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Measuring The World Natural Rate Of Interest

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  • Mark A. Wynne
  • Ren Zhang

Abstract

This article makes the first attempt to estimate the time‐varying natural rate jointly with the output gap and trend potential output growth for the world as a whole using a simple unobserved components model broadly following the methodology developed by Laubach, T., and J. Williams (“Measuring the Natural Rate of Interest.” Review of Economics and Statistics, 85(4), 2003, 1063–1070). We find that the world natural rate has been trending down for the past few decades. Over a quarter of the variation in the natural rate is accounted for by the trend potential output growth rate. However, the relationship between the world natural interest rate and the world trend growth is modest and not statistically significant. (JEL E4, E52, E32, C32)

Suggested Citation

  • Mark A. Wynne & Ren Zhang, 2018. "Measuring The World Natural Rate Of Interest," Economic Inquiry, Western Economic Association International, vol. 56(1), pages 530-544, January.
  • Handle: RePEc:bla:ecinqu:v:56:y:2018:i:1:p:530-544
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    File URL: https://doi.org/10.1111/ecin.12500
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    References listed on IDEAS

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    1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
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    6. Trehan, Bharat & Wu, Tao, 2007. "Time-varying equilibrium real rates and monetary policy analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1584-1609, May.
    7. Andrea Pescatori & Jarkko Turunen, 2015. "Lower for Longer; Neutral Rates in the United States," IMF Working Papers 15/135, International Monetary Fund.
    8. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    9. Martínez-García, Enrique & Grossman, Valerie & Mack, Adrienne, 2015. "A contribution to the chronology of turning points in global economic activity (1980–2012)," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 170-185.
    10. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    11. James D. Hamilton & Ethan S. Harris & Jan Hatzius & Kenneth D. West, 2016. "The Equilibrium Real Funds Rate: Past, Present, and Future," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 660-707, November.
    12. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
    13. Clark, Todd E. & Kozicki, Sharon, 2005. "Estimating equilibrium real interest rates in real time," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 395-413, December.
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    16. Razin, Assaf & Yuen, Chi-Wa, 2002. "The 'New Keynesian' Phillips curve: closed economy versus open economy," Economics Letters, Elsevier, vol. 75(1), pages 1-9, March.
    17. Mark A. Wynne & Ren Zhang, 2018. "Estimating the natural rate of interest in an open economy," Empirical Economics, Springer, vol. 55(3), pages 1291-1318, November.
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    Cited by:

    1. repec:spr:empeco:v:55:y:2018:i:3:d:10.1007_s00181-017-1315-5 is not listed on IDEAS
    2. Jens Klose, 2018. "Equilibrium Real Interest Rates for the BRICS Countries," MAGKS Papers on Economics 201814, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Grossman, Valerie & Martinez-Garcia, Enrique & Wynne, Mark A. & Zhang, Ren, 2019. "Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies," Globalization Institute Working Papers 359, Federal Reserve Bank of Dallas, revised 31 Mar 2019.
    4. Gabriele Fiorentini & Alessandro Galesi & Gabriel Pérez-Quirós & Enrique Sentana, 2018. "The rise and fall of the natural interest rate," Working Papers 1822, Banco de España;Working Papers Homepage.
    5. Mark A. Wynne & Ren Zhang, 2018. "Estimating the natural rate of interest in an open economy," Empirical Economics, Springer, vol. 55(3), pages 1291-1318, November.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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