Econometric issues in the estimation of the natural rate of interest

Daniel Buncic

Economic Modelling, 2024, vol. 132, issue C

Abstract: The natural rate of interest is a key benchmark steady-state rate of return that is used by central banks to measure the stance of monetary policy. Asset managers rely on estimates of the natural rate to make long-term investment decisions for their clients. This paper outlines a number of important econometric issues in the estimation of the natural rate of interest from a widely used structural model. Using a simulation experiment as well as empirical data for the U.S., I show that one of the key parameters of the structural model is overestimated and leads to a spuriously amplified downward trend in the natural rate. The paper shows how the overestimation can be remedied and provides alternative estimates of the natural rate. Various other issues are discussed that policy makers should be aware of when utilizing this model’s natural rate estimates for policy decision.

Keywords: Natural rate of interest; Median Unbiased Estimation; Kalman Filter; Spurious relations; Misspecified econometric models (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 O40 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:132:y:2024:i:c:s0264999323004534

DOI: 10.1016/j.econmod.2023.106641

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