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The Natural Rate of Interest: Information Derived from a Shadow Rate Model

Author

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  • Viktors Ajevskis

    (Bank of Latvia)

Abstract

The study proposes an estimation method of the natural rate of interest based on the shadow rate term structure of interest rates model and using information from nominal yields data. For the purpose of comparison and robustness check, different samples for the estimation of the natural rate of interest – three for the euro area and two for the US – are considered. The estimates based on all considered samples show a downturn trend in the estimated natural rates of interest for the euro area. However, since the beginning of 2013, this downward trend has levelled off. Compared to the results obtained by affine models, the shadow rate model produces lower estimates of natural rates of interest. From the beginning of 2013, the dynamics of estimated series of the US natural rate of interest closely follows the series produced by Laubach–Williams. However, before that the series are more divergent. In order to demonstrate the use of the natural rate of interest, we employ the estimated series of the natural rate of interest in the balance-approach version of the Taylor rule. The results imply that, at the end of the sample in July 2017, Taylor rule-suggested policy rates were in line with the actual ECB policy rates.

Suggested Citation

  • Viktors Ajevskis, 2018. "The Natural Rate of Interest: Information Derived from a Shadow Rate Model," Working Papers 2018/02, Latvijas Banka.
    • Handle: RePEc:ltv:wpaper:201802
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    Cited by:

    1. Lucio Gobbi & Ronny Mazzocchi & Roberto Tamborini, 2022. "Monetary policy, rational confidence, and Neo‐Fisherian depressions," Metroeconomica, Wiley Blackwell, vol. 73(4), pages 1179-1199, November.
    2. Brand, Claus & Goy, Gavin W & Lemke, Wolfgang, 2020. "Natural rate chimera and bond pricing reality," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224546, Verein für Socialpolitik / German Economic Association.
    3. Christina Anderl & Guglielmo Maria Caporale, 2023. "Shadow rates as a measure of the monetary policy stance: Some international evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(5), pages 399-422, November.
    4. Brand, Claus & Bielecki, Marcin & Penalver, Adrian, 2018. "The natural rate of interest: estimates, drivers, and challenges to monetary policy JEL Classification: E52, E43," Occasional Paper Series 217, European Central Bank.
    5. policy, Work stream on macroprudential & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas, 2021. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.

    More about this item

    Keywords

    natural rate of interest; term structure of interest rates; lower bound; non-linear Kalman filter;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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