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(Un)naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate

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Author Info
Marco Lombardi
Silvia Sgherri

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Abstract

Following the 2000 stockmarket crash, have US interest rates been held "too low" in relation to their natural level? Most likely, yes. Using a structural model, this paper attempts a real-time assessment of the US monetary policy while ensuring consistency between the specification of price adjustments and the evolution of the economy under flexible prices. To do this, the model's likelihood function is evaluated using particle filtering, allowing for sequential inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Accounting for real-time expectations and time variation in underlying equilibrium levels is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 142.

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Date of creation: Jun 2007
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Handle: RePEc:dnb:dnbwpp:142

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Related research
Keywords: Natural Interest Rate DSGE Models Bayesian Analysis Particle Filters

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
G3 - Financial Economics - - Corporate Finance and Governance

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Antje Berndt & Iulian Obreja, 2007. "The pricing of risk in European credit and corporate bond markets," Working Paper Series 805, European Central Bank. [Downloadable!]
  2. Nikolaus Siegfried & Emilia Simeonova & Cristina Vespro, 2007. "Choice of currency in bond issuance and the international role of currencies," Working Paper Series 814, European Central Bank. [Downloadable!]
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