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Measuring the natural rate of interest

Thomas Laubach () and John Williams ()

No 2001-56, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: A key variable for the conduct of monetary policy is the natural rate of interest -- the real interest rate consistent with output equaling potential and stable inflation. Economic theory implies that the natural rate of interest varies over time and depends on the trend growth rate of output. In this paper we apply the Kalman filter to jointly estimate the natural rate of interest, potential output, and the trend growth rate, and examine the empirical relationship between these estimated unobserved series. We find substantial variation in the natural rate of interest over the past four decades in the United States. Our natural rate estimates vary about one-for-one with changes in the trend growth rate. We show that policymakers' mismeasurement of the natural rate of interest can cause a significant deterioration in macroeconomic stabilization.

Keywords: Interest; rates (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pke
Date: 2001
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Journal Article: Measuring the Natural Rate of Interest (2003) Downloads
Working Paper: Measuring the Natural Rate of Interest (2001)
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