Testing for time variation in the natural rate of interest

Tino Berger and Bernd Kempa

Journal of Applied Econometrics, 2019, vol. 34, issue 5, 836-842

Abstract: This paper replicates in a wider sense the unobserved components model of Laubach and Williams (Review of Economics and Statistics, 2003, 85, 1063–1070) to estimate the natural rate of interest (NRI) and investigates the role of model uncertainty. A stochastic Bayesian model selection procedure is employed to test the hypothesis of time variation in the NRI against a constant NRI. The model selection confirms time variation in the NRI as a result of changes in potential output growth, but other determinants of the NRI are found constant.

Date: 2019
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