(Un)naturally low? Sequential Monte Carlo tracking of the US natural interest rate

Marco Lombardi and Silvia Sgherri

No 794, Working Paper Series from European Central Bank

Abstract: Following the 2000 stockmarket crash, have US interest rates been held "too low" in relation to their natural level? Most likely, yes. Using a structural neo-Keynesian model, this paper attempts a real-time evaluation of the US monetary policy stance while ensuring consistency between the specification of price adjustments and the evolution of the econ- omy under flexible prices. To do this, the model's likelihood function is evaluated using a Sequential Monte Carlo algorithm providing inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Tracking down the evolution of underlying stochastic processes in real time is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data. JEL Classification: E43, C11, C15

Keywords: Bayesian analysis; DSGE models; Natural Interest Rate; Particle Filters (search for similar items in EconPapers)
Date: 2007-08
Note: 114572
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007794

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