Measuring the Natural Rate of Interest: A Note on Transitory Shocks

33 Pages Posted: 5 Jun 2017 Last revised: 21 Feb 2019

See all articles by Kurt F. Lewis

Kurt F. Lewis

Board of Governors of the Federal Reserve System

Francisco Vazquez-Grande

Board of Governors of the Federal Reserve System

Date Written: 2017-06

Abstract

We present evidence that the natural rate of interest is buffeted by both permanent and transitory shocks. We establish this result by estimating a benchmark model with Bayesian methods and loose priors on the unobserved drivers of the natural rate. When subject to transitory shocks, the median estimate for the U.S. economy is more procyclical, displays a less marked secular decline, and is therefore higher following the Great Recession than most estimates in the literature.

Keywords: Kalman filter, Monetary policy, Natural rate of interest, Pileup, Trend growth

JEL Classification: C32, E43, E52, O40

Suggested Citation

Lewis, Kurt F. and Vazquez-Grande, Francisco, Measuring the Natural Rate of Interest: A Note on Transitory Shocks (2017-06). FEDS Working Paper No. 2017-059. Available at SSRN: https://ssrn.com/abstract=2979915 or http://dx.doi.org/10.17016/FEDS.2017.059r1

Kurt F. Lewis (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francisco Vazquez-Grande

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-973-7488 (Phone)

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