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Working Paper
What Can the Data Tell Us About the Equilibrium Real Interest Rate?
The equilibrium real interest rate (r*) is the short-term real interest rate that, in the long run, is consistent with aggregate production at potential and stable inflation. Estimation of r* faces considerable econometric and empirical challenges. On the econometric front, classical inference confronts the "pile-up" problem. Empirically, the co-movement of output, inflation, unemployment, and real interest rates is too weak to yield precise estimates of r*. These challenges are addressed by applying Bayesian methods and examining the role of several "demand shifters", including asset ...