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

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  • Marco Lombardi
  • Silvia Sgherri

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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Bibliographic Info

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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Keywords: Natural Interest Rate; DSGE Models; Bayesian Analysis; Particle Filters;

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Cited by:
  1. Andreas Hoffmann, 2010. "An Overinvestment Cycle In Central And Eastern Europe?," Metroeconomica, Wiley Blackwell, vol. 61(4), pages 711-734, November.
  2. Gerlach, Stefan & Moretti, Laura, 2011. "Monetary policy and TIPS yields before the crisis," CFS Working Paper Series 2011/22, Center for Financial Studies (CFS).
  3. Ronny Mazzocchi, 2013. "Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation," DEM Discussion Papers 2013/16, Department of Economics and Management.
  4. Reinhart, Carmen & Felton, Andrew, 2008. "The First Global Financial Crisis of the 21st Century," MPRA Paper 11862, University Library of Munich, Germany.

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