What Can the Data Tell Us About the Equilibrium Real Interest Rate
By Michael T. Kiley. 2015
125 citations recorded by the source corpus.
The equilibrium real interest rate (r*) is the short-term real interest rate that, in the long run, is consistent with aggregate production at potential and stable inflation. Estimation of r* faces considerable econometric and empirical challenges. On the econometric front, classical inference confronts the "pile-up" problem. Empirically, the co-movement of output, inflation, unemployment, and real interest rates is too weak to yield precise estimates of r*. These challenges are addressed by applying Bayesian methods and examining the role of several "demand shifters", including asset prices, fiscal policy, and credit conditions. We find that the data provide relatively little information on the r* data-generating process, as the posterior distribution of this process lies very close to its prior. This result contrasts sharply with those for the trend growth or natural rate of unemployment processes. Second, credit spreads are very important for the estimated links between output and interest rates and hence for estimates of r*. Estimates of r* that account for this range of considerations are more stable than other estimates, with r* at the end of 2014 equal to approximately 1-1/4 percent.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/a6c8b80caec6477a8ec41dc0d57fa795afd1c68e
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In Economics and Econometrics
- C. Borio
- Mathias Drehmann
- Piti Disyatat
- John C. Williams
- Campbell Leith
- M. Juselius
- Eric M. Leeper
- Thomas Laubach
Citations in the corpus
- Understanding Inflation as a Joint Monetary-Fiscal Phenomenon (2016, background): “Kiley (2015) estimates that the real federal funds rate was negative from the onset of the recession through the middle of 2015.”
- Measuring the Natural Rate of Interest: International Trends and Determinants (2016, methodology): “This finding is robust to alternative methodologies (Hamilton et al. 2015; Kiley 2015; Lubik and Matthes 2015; Laubach and Williams 2016).”
- Monetary Policy, the Financial Cycle and Ultralow Interest Rates (2016, background): “Kiley (2015) finds that the comovement of output, inflation, unemployment and real interest rates, on its own, is too weak to yield precise estimates of the natural interest rate.”