Taylor-Rule Consistent Estimates of the Natural Rate of Interest
56 Pages Posted: 29 Mar 2019
Date Written: March 27, 2019
We estimate the natural rate of interest for the US and the euro area in a semi-structural model comprising a Taylor rule. Our estimates feature key elements of Laubach and Williams (2003), but are more consistent with using conventional policy rules: we model inflation to be stationary, with the output gap pinning down deviations of inflation from its objective (rather than relative to a random walk). We relax some constraints on the correlation of latent factor shocks to make the original unobserved-components framework more amenable to structural interpretation and to reduce filtering uncertainty. We show that resulting natural rate metrics are more consistent with estimates from structural models.
Keywords: Natural Rate of Interest, Equilibrium Real Rate, Taylor Rule, Bayesian Estimation, Unobserved Components, Beveridge-Nelson Decomposition
JEL Classification: C11, E32, E43, E52
Suggested Citation: Suggested Citation