The Rise and Fall of the Natural Interest Rate

69 Pages Posted: 19 Jul 2018

See all articles by Gabriele Fiorentini

Gabriele Fiorentini

Universita di Firenze - Dipartimento di Statistica

Alessandro Galesi

Banco de España

Gabriel Perez-Quiros

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 16, 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 fl at. In those empirically relevant situations, a local level specifi cation 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 fi lter, observability, demographics.

JEL Classification: E43, E52, C32.

Suggested Citation

Fiorentini, Gabriele and Galesi, Alessandro and Perez-Quiros, Gabriel and Sentana, Enrique, The Rise and Fall of the Natural Interest Rate (July 16, 2018). Banco de Espana Working Paper No. 1822. Available at SSRN: https://ssrn.com/abstract=3214487 or http://dx.doi.org/10.2139/ssrn.3214487

Gabriele Fiorentini (Contact Author)

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

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Gabriel Perez-Quiros

Banco de España ( email )

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/

Financial Markets Group

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London School of Economics & Political Science (LSE)
London WC2A 2AE
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+44 20 7955 7002 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

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