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Estimating Key Economic Variables: The Policy Implications

Eric S. Rosengren ()
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Eric S. Rosengren: Federal Reserve Bank of Boston

Atlantic Economic Journal, 2018, vol. 46, issue 2, 139-150

Abstract: Abstract The current monetary policy debate has focused on current estimates and the future path of the natural rate of unemployment and the equilibrium interest rate. Estimates of the natural rate of unemployment should vary over time with changes in demographics and improvements in human capital. However, these changes should be gradual. This paper shows that the estimates of the natural rate of unemployment by Federal Reserve officials and private-sector economists seem to move pro-cyclically, potentially showing too much weight given to short-term fluctuations in economic variables. As with the natural rate, there are good reasons to expect the equilibrium interest rate to change over time. In fact, the level may actually be more responsive to current economic data, reflecting changes in aggregate savings and investment. Yet, we see that equilibrium interest rate estimates by both Federal Reserve officials and private-sector economists have declined quite dramatically over the past five years. A potential concern raised in this paper is that estimates of these critical economic variables for policy determination appear to be overly sensitive to high frequency economic data.

Keywords: Natural rate of unemployment; Equilibrium interest rate; E52; E58 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kap:atlecj:v:46:y:2018:i:2:d:10.1007_s11293-018-9572-z