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The Natural Rate of Interest in a Nonlinear DSGE Model

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  • Yasuo Hirose
  • Takeki Sunakawa

Abstract

This paper investigates how and to what extent nonlinearity, including the zero lower bound on the nominal interest rate, affects the estimates of the natural rate of interest in a dynamic stochastic general equilibrium model with sticky prices and wages. We find that the estimated natural rate of interest in a nonlinear model is substantially different from that in its linear counterpart because of a contractionary effect of the zero lower bound, and that other nonlinearities such as price and wage dispersion, from which a linear model abstracts, play a minor role in identifying the natural rate.

Suggested Citation

  • Yasuo Hirose & Takeki Sunakawa, 2017. "The Natural Rate of Interest in a Nonlinear DSGE Model," CAMA Working Papers 2017-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2017-38
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-02/38_2017_hirose_sunakawa.pdf
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    Cited by:

    1. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    2. Zhang, Ren & Martínez-García, Enrique & Wynne, Mark A. & Grossman, Valerie, 2021. "Ties that bind: Estimating the natural rate of interest for small open economies," Journal of International Money and Finance, Elsevier, vol. 113(C).
    3. Hirokuni Iiboshi & Mototsugu Shintani & Kozo Ueda, 2022. "Estimating a Nonlinear New Keynesian Model with the Zero Lower Bound for Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1637-1671, September.
    4. Martínez-García, Enrique, 2021. "Get the lowdown: The international side of the fall in the U.S. natural rate of interest," Economic Modelling, Elsevier, vol. 100(C).
    5. Beechey, Meredith & Österholm, Pär & Poon, Aubrey, 2023. "Estimating the US trend short-term interest rate," Finance Research Letters, Elsevier, vol. 55(PA).
    6. Dennis, Richard, 2024. "Using a hyperbolic cross to solve non-linear macroeconomic models," Journal of Economic Dynamics and Control, Elsevier, vol. 163(C).

    More about this item

    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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