Measuring the Natural Rate of Interest

By Thomas Laubach, John C. Williams. Review of Economics and Statistics, 2001

1,165 citations recorded by the source corpus.

The natural rate of interestthe real interest rate consistent with output equaling its natural rate and stable inflationplays a central role in macroeconomic theory and monetary policy. Estimation of the natural rate of interest, however, has received little attention. We apply the Kalman filter to estimate jointly time-varying natural rates of interest and output and trend growth. We find a close link between the natural rate of interest and the trend growth rate, as predicted by theory. Estimates of the natural rate of interest, however, are very imprecise and subject to considerable real-time measurement error.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/6f845d8229c2745c9ddb57b0c007ba80116b8c27

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

Citations in the corpus

Money and the natural rate of interest: structural estimates for the United States and the Euro area (2007, neutral): “Third, other empirical estimates of natural rate and real-rate gap series using systems methods, whether with ad hoc models (e.g., Laubach and Williams, 2003) or DSGE models (e.g., Smets and Wouters, 2003), sacri(cid:133)ce information on the natural rate by not including real money balances in the…”
The Macroeconomics of Trend Inflation (2014, methodology): “97 The statistical models considered are a time-varying parameter VAR; the Laubach and Williams (2003) model, which allows a unit root in output growth and the equilibrium interest rate; and a univariate model with GARCH error processes. variables.”
Imperfect Information, Real‐Time Data and Monetary Policy in the Euro Area (2012, neutral): “Recent studies have proposed statistical methods and structural macroeconometric techniques to estimate natural rates (Laubach and Williams, 2003).”
(How) do the ECB and the Fed React to Financial Market Uncertainty? The Taylor Rule in Times of Crisis (2010, methodology): “9 In fact, Laubach and Williams did not restrict the coefficient of the annualized growth rate to unity as we do here. But as the estimates of this coefficient in other papers generally turn out to be quite close to one, we feel legitimized to do so. 10 Since data for the most variables of the euro ”
On Lower-Bound Traps: A Framework for the Analysis of Monetary Policy in the 'Age' of Central Banks (2006, positive): “For instance, in a study by Laubach and Williams (2001), the natural rate of interest is estimated using quarterly data for the United States over the period 1961 to 2000. In all the model specifications displayed, the authors find substantial variations in its estimated value throughout that period”
A Tale of Two Decades: The Ecb's Monetary Policy at 20 (2019, background): “However, there are many forces that can affect r* without affecting potential output, see for instance Laubach and Williams (2003).”
Maintaining Low Inflation: Money, Interest Rates, and Policy Stance (2007, neutral): “4 needed to match observed inflation with target does not look anything like a plausible equilibrium real interest rate, as estimated e.g. in Laubach and Williams (2003), nor to what the Fed could have assumed as an equilibrium interest rate. r t is close to 0% from the mid-1960 to the late 1970s,…”
Natural rate measures in an estimated DSGE model of the U.S. economy (2008, neutral): “A conceptually similar output gap—albeit one from a reduced-form model of Laubach and Williams [2003]—shows a similar pattern over the 1990s because of the behavior of inflation.”
The science of monetary policy: an imperfect knowledge perspective (2018, neutral): “Orphanides (2001), Orphanides and Williams (2002) and Laubach and Williams (2003) document and discuss the evidence for very noisy estimates of natural rates, in particular during the 1970s.”
The Stress of Having a Single Monetary Policy in Europe (2008, methodology): “After reporting our Taylor rule estimates for the euro area, we distinguish between a country-specific point of view (section 4.3) and an area wide perspective (section 4.4).”
The long-run information effect of central bank communication (2019, neutral): “11 Martin and Ross (2019) present a non-Gaussian bond-pricing framework in which a similar effect could arise if signals altered transition probabilities between persistent states of the world.”
Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events (2011, methodology): “(See Laubach and Williams, 2003).”