Measuring the natural rate of interest redux

Thomas Laubach and John Williams

No 2015-16, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Persistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.

Pages: 31 pages
Date: 2015-10-31
New Economics Papers: this item is included in nep-mac and nep-mon
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Working Paper: Measuring the Natural Rate of Interest Redux (2016)
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DOI: 10.24148/wp2015-16

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