Working Paper
Measuring the natural rate of interest
Abstract: A key variable for the conduct of monetary policy is the natural rate of interest -- the real interest rate consistent with output equaling potential and stable inflation. Economic theory implies that the natural rate of interest varies over time and depends on the trend growth rate of output. In this paper we apply the Kalman filter to jointly estimate the natural rate of interest, potential output, and the trend growth rate, and examine the empirical relationship between these estimated unobserved series. We find substantial variation in the natural rate of interest over the past four decades in the United States. Our natural rate estimates vary about one-for-one with changes in the trend growth rate. We show that policymakers' mismeasurement of the natural rate of interest can cause a significant deterioration in macroeconomic stabilization.
Keywords: Interest rates;
Access Documents
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2001/200156/200156abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2001/200156/200156pap.pdf
Authors
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2001
Number: 2001-56