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The Role of Initial States in Estimates of the Natural Rate of Interest

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  • Jaqueson K. Galimberti

Abstract

This paper provides an analysis of the relevance of initial states for the estimation of natural rates of interest. It focuses on U.S. data using an established semi-structural macroeconomic model with time-varying trends. Alternative methods for the specification of initial states are reviewed and evaluated. The results indicate that initial states can significantly impact end-of-sample estimates of the natural rate of interest, with alternative initials leading to estimates about 40 to 130 basis points lower than original estimates. Re-estimating the model with alternative initials also leads to more volatile natural rate estimates. Key dimensions of the initialization issue are discussed, including the uncertainty around initial estimates, the use of diffuse prior initials, and jointly estimated initials. An extension of the original method using an unobserved component model that makes all initial estimates data-dependent is found to provide the most robust model and state estimates relative to varying sample definitions.

Suggested Citation

  • Jaqueson K. Galimberti, 2026. "The Role of Initial States in Estimates of the Natural Rate of Interest," CAMA Working Papers 2026-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2026-38
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    File URL: https://crawford.anu.edu.au/sites/default/files/2026-05/38_2026_%20Galimberti.pdf
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    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
    • 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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