Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches

Thomas Lubik and Christian Matthes

Richmond Fed Economic Brief, 2015, issue Oct

Abstract: The natural rate of interest is a key concept in monetary economics because its level relative to the real rate of interest allows economists to assess the stance of monetary policy. However, the natural rate of interest cannot be observed; it must be calculated using identifying assumptions. This Economic Brief compares the popular Laubach-Williams approach to calculating the natural rate with an alternative method that imposes fewer theoretical restrictions. Both approaches indicate that the natural rate has been above the real rate for a long time.

Date: 2015
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