Survey Measures of the Natural Rate of Interest and Long-Run Policy Rate Expectations

Abstract

This paper constructs survey-based measures of long-run neutral policy rate expectations using market participant surveys conducted by several central banks in the United States, euro area, United Kingdom, and Canada. The paper compares such alternative estimates of r-star to more traditional structural estimates of r-star such as those of Holston, Laubach, and Williams (2017) and Lubik and Matthes (2015). While all measures of r-star have declined over time prior to the COVID-19 pandemic along with traditional structural measures, there has been substantial divergence in r-star estimates during the early 2020s. Namely, survey-based measures of long-run neutral policy rate expectations have risen while structural estimates of the natural rate have exhibited mixed dynamics during this period of resurgent inflation. At the peak of the 2022–2023 tightening cycle, survey-based measures imply that U.S. monetary policy was approximately 1 to 1.5 percentage points less restrictive than suggested by standard model-based r-star estimates. These survey measures closely track the Federal Reserve’s Summary of Economic Projections (SEP) median longer-run federal funds rate forecast. These measures should be interpreted as expectations-based neutral rate estimates reflecting market participants’ beliefs about the long-run policy rate, rather than structural natural rates derived from economic primitives.