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Measuring the Natural Rate of Interest

  • Thomas Laubach

    (Board of Governors of the Federal Reserve System)

  • John C. Williams

    (Federal Reserve Bank of San Francisco)

The natural rate of interest-the real interest rate consistent with output equaling its natural rate and stable inflation-plays a central role in macroeconomic theory and monetary policy. Estimation of the natural rate of interest, however, has received little attention. We apply the Kalman filter to estimate jointly time-varying natural rates of interest and output and trend growth. We find a close link between the natural rate of interest and the trend growth rate, as predicted by theory. Estimates of the natural rate of interest, however, are very imprecise and subject to considerable real-time measurement error. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 85 (2003)
Issue (Month): 4 (November)
Pages: 1063-1070

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Handle: RePEc:tpr:restat:v:85:y:2003:i:4:p:1063-1070
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