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Lower for Longer: Neutral Rate in the U.S

Author

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  • Andrea Pescatori

    (International Monetary Fund)

  • Jarkko Turunen

    (International Monetary Fund)

Abstract

We use a semi-structural model to estimate neutral rates in the United States. Our Bayesian estimation incorporates prior information on the output gap and potential output (based on a production function approach) and accounts for unconventional monetary policies using estimates of “shadow” policy rates. Results show a significant trend decline in the neutral real rate post-1990s, driven only in part by a decline in trend growth, whereas other factors (including excess global savings and risk premia) matter. Neutral rates likely turned negative during the global financial crisis and are expected to increase only gradually looking forward.

Suggested Citation

  • Andrea Pescatori & Jarkko Turunen, 2016. "Lower for Longer: Neutral Rate in the U.S," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 708-731, November.
    • Handle: RePEc:pal:imfecr:v:64:y:2016:i:4:d:10.1057_s41308-016-0017-x
    DOI: 10.1057/s41308-016-0017-x
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    References listed on IDEAS

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    3. Zhang, Xiaoge, 2022. "Belief-driven growth slowdowns and zero-bounded risk-free rate," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    4. Berger, Tino & Kempa, Bernd & Zou, Feina, 2023. "The role of macroeconomic uncertainty in the determination of the natural rate of interest," Economics Letters, Elsevier, vol. 229(C).
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    6. Lee, Dong Jin & Hahm, Joon-Ho & Park, Hail & Park, Ki Young, 2020. "Measuring the Natural Rate of Interest with Financial Gaps: The Cases of Japan and South Korea," Japan and the World Economy, Elsevier, vol. 54(C).
    7. Saeed Zaman, 2021. "A Unified Framework to Estimate Macroeconomic Stars," Working Papers 21-23R, Federal Reserve Bank of Cleveland, revised 15 Aug 2022.
    8. Daniel Rees & Guofeng Sun, 2021. "The natural interest rate in China," BIS Working Papers 949, Bank for International Settlements.
    9. Eo, Yunjong & Kang, Kyu Ho, 2020. "The effects of conventional and unconventional monetary policy on forecasting the yield curve," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    10. Kurt F. Lewis & Francisco Vazquez-Grande, 2017. "Measuring the Natural Rate of Interest : A Note on Transitory Shocks," Finance and Economics Discussion Series 2017-059, Board of Governors of the Federal Reserve System (U.S.).
    11. Niko Hauzenberger & Daniel Kaufmann & Rebecca Stuart & Cédric Tille, 2022. "What Drives Long-Term Interest Rates? Evidence from the Entire Swiss Franc History 1852-2020," IRENE Working Papers 22-03, IRENE Institute of Economic Research.
    12. Craig S. Hakkio & Andrew Lee Smith, 2017. "Bond Premiums and the Natural Real Rate of Interest," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-39.
    13. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.
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    15. Stefano Neri & Giuseppe Ferrero, 2017. "Monetary policy in a low interest rate environment," Questioni di Economia e Finanza (Occasional Papers) 392, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    E4; E52;

    JEL classification:

    • 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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