The Rise and Fall of the Natural Interest Rate
69 Pages Posted: 30 Jul 2018
Date Written: July 9, 2018
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: Suggested Citation