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

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Author Info
Marco J. Lombardi () (University of Pisa, Lungarno Pacinotti 43, 56126 Pisa, Italy.)
Silvia Sgherri () (De Nederlandsche Bank and International Monetary Fund, Postbus 98, 1000 AB Amsterdam, Netherlands.)

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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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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
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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:
(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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