Estimating equilibrium real interest rates in real time
Abstract: We use a range of simple models and 22 years of real-time data vintages for the U.S. to assess the difficulties of estimating the equilibrium real interest rate in real time. Model specifications differ according to whether the time-varying equilibrium real rate is linked to trend growth, and whether potential output and growth are defined by the CBO's estimates or treated as unobserved variables. Our results reveal a high degree of specification uncertainty, an important one-sided filtering problem, and considerable imprecision due to data uncertainty. Also, the link between trend growth and the equilibrium real rate is shown to be quite weak. Overall, we conclude that statistical estimates of the equilibrium real rate will be difficult to use reliably in practical policy applications.
File(s): File format is application/pdf http://www.kansascityfed.org/Publicat/Reswkpap/pdf/RWP04-08.pdf
Provider: Federal Reserve Bank of Kansas City
Part of Series: Research Working Paper
Publication Date: 2004
Number: RWP 04-08