The Rise and Fall of the Natural Interest Rate

69 Pages Posted: 30 Jul 2018

See all articles by Gabriele Fiorentini

Gabriele Fiorentini

Universita di Firenze - Dipartimento di Statistica

Alessandro Galesi

idealista

Gabriel Pérez-Quirós

Banco de España

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: July 9, 2018

Abstract

We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.

Keywords: natural rate of interest, Kalman filter, observability, demographics

JEL Classification: E43, E52, C32

Suggested Citation

Fiorentini, Gabriele and Galesi, Alessandro and Pérez-Quirós, Gabriel and Sentana, Enrique, The Rise and Fall of the Natural Interest Rate (July 9, 2018). Banco de Espana Working Paper No. 1822, Available at SSRN: https://ssrn.com/abstract=3210707 or http://dx.doi.org/10.2139/ssrn.3210707

Gabriele Fiorentini

Universita di Firenze - Dipartimento di Statistica ( email )

Viale Morgagni, 59
50134 Firenze
Italy
+39 055 4237 274 (Phone)
+39 055 4223 560 (Fax)

Alessandro Galesi (Contact Author)

idealista ( email )

Madrid, Madrid 28014
Spain

Gabriel Pérez-Quirós

Banco de España

Alcala 50
Madrid 28014
Spain

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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