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Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy

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  • Manuel Gonzalez-Astudillo
  • Jean-Philippe Laforte

Abstract

We estimate the natural rate of interest (r*) using a semi-structural model of the U.S. economy that jointly characterizes the trend and cyclical factors of key macroeconomic variables such as output, the unemployment rate, inflation, and short- and long-term interest rates. We specify a monetary policy rule and an equation that characterizes the 10-year Treasury yield to exploit the information provided by both interest rates to infer r*. However, the use of a monetary policy rule with a sample that spans the Great Recession and its aftermath poses a challenge because of the effective lower bound. We devise a Bayesian estimation technique that incorporates a Tobit-like specification to deal with the censoring problem. We compare and validate our model specifications using pseudo out-of-sample forecasting exercises and Bayes factors. Our results show that the smoothed value of r* declined sharply around the Great Recession, eventually falling below zero, and has remained negative since then. Our results also indicate that obviating the censoring would imply higher estimates of r* than otherwise.

Suggested Citation

  • Manuel Gonzalez-Astudillo & Jean-Philippe Laforte, 2020. "Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy," Finance and Economics Discussion Series 2020-085, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2020-85
    DOI: 10.17016/FEDS.2020.085
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    References listed on IDEAS

    as
    1. J. David López-Salido & Gerardo Sanz-Maldonado & Carly Schippits & Min Wei, 2020. "Measuring the Natural Rate of Interest: The Role of Inflation Expectations," FEDS Notes 2020-06-19, Board of Governors of the Federal Reserve System (U.S.).
    2. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    3. Blanchard, Oliver & Cerutti, Eugenio & SUmmers, Lawrence, 2015. "Inflation and Activity - Two Explorations and Their Monetary Policy Implications," Working Paper Series 15-070, Harvard University, John F. Kennedy School of Government.
    4. Kozicki, Sharon & Tinsley, P. A., 2001. "Term structure views of monetary policy under alternative models of agent expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 149-184, January.
    5. Manuel Gonzalez-Astudillo & John M. Roberts, 2016. "When Can Trend-Cycle Decompositions Be Trusted?," Finance and Economics Discussion Series 2016-099, Board of Governors of the Federal Reserve System (U.S.).
    6. Brand, Claus & Mazelis, Falk, 2019. "Taylor-rule consistent estimates of the natural rate of interest," Working Paper Series 2257, European Central Bank.
    7. Olivier Blanchard & Eugenio Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," NBER Working Papers 21726, National Bureau of Economic Research, Inc.
    8. Manuel Gonzalez‐Astudillo, 2018. "Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov‐Switching Estimation Exploiting Monetary‐Fiscal Policy Interdependence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 115-154, February.
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    More about this item

    Keywords

    Natural rate of interest; Natural unemployment rate; Output gap; Shadow interest rate;

    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
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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