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Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches

Author

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  • Lubik, Thomas A.

    (Federal Reserve Bank of Richmond)

  • Matthes, Christian

    (Federal Reserve Bank of Richmond)

Abstract

The natural rate of interest is a key concept in monetary economics because its level relative to the real rate of interest allows economists to assess the stance of monetary policy. However, the natural rate of interest cannot be observed; it must be calculated using identifying assumptions. This Economic Brief compares the popular Laubach-Williams approach to calculating the natural rate with an alternative method that imposes fewer theoretical restrictions. Both approaches indicate that the natural rate has been above the real rate for a long time.

Suggested Citation

  • Lubik, Thomas A. & Matthes, Christian, 2015. "Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Oct, pages 1-6.
  • Handle: RePEc:fip:fedreb:00033
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