IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/11927.html
   My bibliography  Save this paper

Instability, imprecision and inconsistent use of equilibrium real interest rate estimates

Author

Listed:
  • Beyer, Robert
  • Wieland, Volker

Abstract

The current debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. In particular, this concerns estimates derived from a simple aggregate demand and Phillips curve model with time-varying components as proposed by Laubach and Williams (2003). For example, Summers (2014a) refers to these estimates as important evidence for a secular stagnation and the need for fiscal stimulus. Yellen (2015, 2017) has made use of such estimates in order to explain and justify why the Federal Reserve has held interest rates so low for so long. First, we re-estimate the U.S. equilibrium rate with the methodology of Laubach and Williams (2003). Then, we build on their approach and the modifications proposed in M�sonnier and Renne (2007) and Garnier and Wilhelmsen (2009) to provide new estimates for the United States, the euro area and Germany. Third, we subject these estimates to a battery of sensitivity tests. Due to the great uncertainty and sensitivity that accompany these equilibrium rate estimates, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if these estimates are employed to determine the appropriate monetary policy stance, such estimates are better used together with the consistent estimate of the level of potential output.

Suggested Citation

  • Beyer, Robert & Wieland, Volker, 2017. "Instability, imprecision and inconsistent use of equilibrium real interest rate estimates," CEPR Discussion Papers 11927, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11927
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11927
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mesonnier, Jean-Stephane & Renne, Jean-Paul, 2007. "A time-varying "natural" rate of interest for the euro area," European Economic Review, Elsevier, vol. 51(7), pages 1768-1784, October.
    2. John B. Taylor & Volker Wieland, 2016. "Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 51(3), pages 147-154, July.
    3. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    4. 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.
    5. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, March.
    6. 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.
    7. Athanasios Orphanides & John C. Williams, 2009. "Imperfect Knowledge and the Pitfalls of Optimal Control Monetary Policy," Central Banking, Analysis, and Economic Policies Book Series,in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 4, pages 115-144 Central Bank of Chile.
    8. Cúrdia, Vasco & Ferrero, Andrea & Ng, Ging Cee & Tambalotti, Andrea, 2015. "Has U.S. monetary policy tracked the efficient interest rate?," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 72-83.
    9. Beyer, Robert C. M. & Wieland, Volker, 2015. "Schätzung des mittelfristigen Gleichgewichtszinses in den Vereinigten Staaten, Deutschland und dem Euro-Raum mit der Laubach-Williams-Methode," Working Papers 03/2015, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    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. Athanasios Orphanides & Volker Wieland, 2013. "Complexity and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 167-204, January.
    12. 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.
    13. Robert Barsky & Alejandro Justiniano & Leonardo Melosi, 2014. "The Natural Rate of Interest and Its Usefulness for Monetary Policy," American Economic Review, American Economic Association, vol. 104(5), pages 37-43, May.
    14. Julien Garnier & Bjørn-Roger Wilhelmsen, 2009. "The natural rate of interest and the output gap in the euro area: a joint estimation," Empirical Economics, Springer, vol. 36(2), pages 297-319, May.
    15. Lawrence H. Summers, 2014. "Low Equilibrium Real Rates, Financial Crisis, and Secular Stagnation," Book Chapters,in: Martin Neil Baily & John B. Taylor (ed.), Across the Great Divide: New Perspectives on the Financial Crisis, chapter 2 Hoover Institution, Stanford University.
    16. Hamilton, James D., 1986. "A standard error for the estimated state vector of a state-space model," Journal of Econometrics, Elsevier, vol. 33(3), pages 387-397, December.
    17. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
    18. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Belke, Ansgar & Klose, Jens, 2018. "Equilibrium real interest rates, secular stagnation, and the financial cycle: Empirical evidence for euro-area member countries," Ruhr Economic Papers 743, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Beck, Guenter W. & Wieland, Volker, 2017. "How to normalize monetary policy in the Euro area," IMFS Working Paper Series 115, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    3. repec:zbw:svrwjg:201718 is not listed on IDEAS
    4. repec:nbb:ecrart:y:2017:m:september:i:ii:p:69-86 is not listed on IDEAS

    More about this item

    Keywords

    equlibrium real interest rate; estimation; monetary policy;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:11927. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.