Natural Rates Across the Atlantic

61 Pages Posted: 12 Oct 2017

Date Written: September 27, 2017


The paper estimates a closed-economy medium-scale model for the United States and the euro area to assess the current level of the natural rate of interest and shed light on its drivers. The dynamics of the model are driven by permanent and transitory shocks that bear some connection to the explanations put forward in the literature to explain the secular downward trend in interest rates. The analysis shows that the natural rate has declined, contributing to a lowering of nominal and real rates. Risk premium shocks, a short-cut for changes in agents’ preference for safe assets, have been an important driver in the euro area; in the United States, shocks to the risk premium and to the efficiency of investment, which proxy the functioning of the financial sector, have played a major role. These differences in the importance of the shocks underscore the need to adopt a structural model with a rich stochastic structure, featuring permanent and transitory shocks.

Keywords: natural rate of interest, monetary policy, DSGE model, Bayesian methods

JEL Classification: C51, E32, E43, E52

Suggested Citation

Gerali, Andrea and Neri, Stefano, Natural Rates Across the Atlantic (September 27, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1140. Available at SSRN: or

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Stefano Neri (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
+39 06 4792 2821 (Phone)

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