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(Un)naturally low? Sequential Monte Carlo tracking of the US natural interest rate

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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 neo-Keynesian model, this paper attempts a real-time evaluation of the US monetary policy stance 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 a Sequential Monte Carlo algorithm providing inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Tracking down the evolution of underlying stochastic processes in real time is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data. JEL Classification: E43, C11, C15.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 794.

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Length: 52 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070794

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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," CEPR Discussion Papers 8560, C.E.P.R. Discussion Papers.
  3. 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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