IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2016-11.html
   My bibliography  Save this paper

Measuring the Natural Rate of Interest Redux

Author

Listed:
  • Thomas Laubach
  • John C. Williams

Abstract

Persistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.

Suggested Citation

  • Thomas Laubach & John C. Williams, 2016. "Measuring the Natural Rate of Interest Redux," Finance and Economics Discussion Series 2016-11, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2016-11
    DOI: 10.17016/FEDS.2016.011
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/econresdata/feds/2016/files/2016011pap.pdf
    File Function: Full text
    Download Restriction: no

    File URL: http://dx.doi.org/10.17016/FEDS.2016.011
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1406-1435, July.
    2. Bomfim, Antulio N, 1997. "The Equilibrium Fed Funds Rate and the Indicator Properties of Term-Structure Spreads," Economic Inquiry, Western Economic Association International, vol. 35(4), pages 830-846, October.
    3. Andrés, Javier & David López-Salido, J. & Nelson, Edward, 2009. "Money and the natural rate of interest: Structural estimates for the United States and the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 758-776, March.
    4. Michael T. Kiley, 2020. "What Can the Data Tell Us about the Equilibrium Real Interest Rate?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 181-209, June.
    5. 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.
    6. Thomas A. Lubik & Christian Matthes, 2015. "Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Oct.
    7. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-966, November.
    8. William D. Dupor, 2015. "Liftoff and the Natural Rate of Interest," Economic Synopses, Federal Reserve Bank of St. Louis, issue 12.
    9. Laurence M. Ball, 2014. "The Case for a Long-Run Inflation Target of Four Percent," IMF Working Papers 2014/092, International Monetary Fund.
    10. John C Williams, 2015. "The Decline in the Natural Rate of Interest," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 50(2), pages 57-60, April.
    11. Congressional Budget Office, 2014. "The 2014 Long-Term Budget Outlook," Reports 45471, Congressional Budget Office.
    12. Congressional Budget Office, 2014. "The 2014 Long-Term Budget Outlook," Reports 45471, Congressional Budget Office.
    13. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    14. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Benjamin K. Johannsen & Elmar Mertens, 2016. "A Time Series Model of Interest Rates With the Effective Lower Bound," Finance and Economics Discussion Series 2016-033, Board of Governors of the Federal Reserve System (U.S.).
    3. Loretta J. Mester, 2015. "Comments on “The Equilibrium Real Funds Rate: Past, Present, and Future.”," Speech 61, Federal Reserve Bank of Cleveland.
    4. Lansing, Kevin J., 2021. "Endogenous forecast switching near the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 153-169.
    5. Kurt F. Lewis & Francisco Vazquez-Grande, 2017. "Measuring the Natural Rate of Interest : A Note on Transitory Shocks," Finance and Economics Discussion Series 2017-059, Board of Governors of the Federal Reserve System (U.S.).
    6. 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).
    7. John C. Williams, 2017. "Preparing for the Next Storm: Reassessing Frameworks and Strategies in a Low R-star World," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    8. John C. Williams, 2017. "Preparing for the Next Storm: Reassessing Frameworks & Strategies in a Low R-Star World," Speech 176, Federal Reserve Bank of San Francisco.
    9. Singh, Ajay Pratap & Nikolaou, Michael, 2014. "Optimal rules for central bank interest rates subject to zero lower bound," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-67.
    10. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation," MPRA Paper 57212, University Library of Munich, Germany.
    11. Hirokuni Iiboshi & Mototsugu Shintani & Kozo Ueda, 2018. "Estimating a nonlinear new Keynesian model with the zero lower bound for Japan," CAMA Working Papers 2018-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    12. Faust, Jon & Wright, Jonathan H., 2013. "Forecasting Inflation," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 2-56, Elsevier.
    13. Mitra, Kaushik & Honkapohja, Seppo, 2014. "Targeting nominal GDP or prices: : Guidance and expectation dynamics," Research Discussion Papers 4/2014, Bank of Finland.
    14. COMUNALE Mariarosaria & STRIAUKAS Jonas, 2017. "Unconventional monetary olicy: interest rates and low inflation. A review of literature and methods," LIDAM Discussion Papers CORE 2017026, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    15. Taisuke Nakata & Sebastian Schmidt, 2019. "Gradualism and Liquidity Traps," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 182-199, January.
    16. Taylor, John B. & Williams, John C., 2010. "Simple and Robust Rules for Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 15, pages 829-859, Elsevier.
    17. José Dorich & Nicholas Labelle St-Pierre & Vadym Lepetyuk & Rhys R. Mendes, 2018. "Could a higher inflation target enhance macroeconomic stability?," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 1029-1055, August.
    18. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    19. John C. Williams, 2015. "Monetary policy and the independence dilemma," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    20. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.

    More about this item

    Keywords

    Econometrics; Money and interest rates;

    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:fip:fedgfe:2016-11. 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: https://edirc.repec.org/data/frbgvus.html .

    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.