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Measuring the natural rate of interest: A note on transitory shocks

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  • Kurt F. Lewis
  • Francisco Vazquez‐Grande

Abstract

We present evidence that the natural rate of interest is buffeted by both permanent and transitory shocks. We establish this result by estimating a benchmark model with Bayesian methods and loose priors on the unobserved drivers of the natural rate. When subject to transitory shocks, the median estimate for the US economy is more procyclical, displays a less marked secular decline, and is therefore higher following the Great Recession than most estimates in the literature.

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  • Kurt F. Lewis & Francisco Vazquez‐Grande, 2019. "Measuring the natural rate of interest: A note on transitory shocks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(3), pages 425-436, April.
    • Handle: RePEc:wly:japmet:v:34:y:2019:i:3:p:425-436
    DOI: 10.1002/jae.2671
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    Cited by:

    1. Congressional Budget Office, 2022. "Quantifying the Uncertainty of Long-Term Economic Projections: Working Paper 2022-07," Working Papers 57711, Congressional Budget Office.
    2. Demirel, Ufuk Devrim & Otterson, James, 2023. "Quantifying the uncertainty of long-term macroeconomic projections," Journal of Macroeconomics, Elsevier, vol. 75(C).
    3. 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).
    4. Fu, Bowen, 2023. "Measuring the trend real interest rate in a data-rich environment," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    5. Saeed Zaman, 2021. "A Unified Framework to Estimate Macroeconomic Stars," Working Papers 21-23R, Federal Reserve Bank of Cleveland, revised 15 Aug 2022.
    6. Murasawa Yasutomo, 2022. "Bayesian multivariate Beveridge–Nelson decomposition of I(1) and I(2) series with cointegration," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 26(3), pages 387-415, June.
    7. Benjamin K. Johannsen & Elmar Mertens, 2021. "A Time‐Series Model of Interest Rates with the Effective Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 1005-1046, August.
    8. Hongjin Li & Naifang Su, 2020. "Financial Factors, Openness and the Natural Interest Rate in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(4), pages 76-100, July.
    9. Francesco Bianchi & Giovanni Nicolo & Dongho Song, 2023. "Inflation and Real Activity over the Business Cycle," Finance and Economics Discussion Series 2023-038, Board of Governors of the Federal Reserve System (U.S.).
    10. Claudio Borio, 2021. "Navigating by r*: safe or hazardous?," BIS Working Papers 982, Bank for International Settlements.

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