Taylor-Rule Consistent Estimates of the Natural Rate of Interest

56 Pages Posted: 29 Mar 2019

See all articles by Claus Brand

Claus Brand

European Central Bank (ECB)

Falk Mazelis

European Central Bank (ECB)

Date Written: March 27, 2019

Abstract

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

Brand, Claus and Mazelis, Falk, Taylor-Rule Consistent Estimates of the Natural Rate of Interest (March 27, 2019). ECB Working Paper No. 2257 (2019); ISBN 978-92-899-3519-7 . Available at SSRN: https://ssrn.com/abstract=3361496

Claus Brand (Contact Author)

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+0049 69 13440 (Phone)
+0044 69 1344 6000 (Fax)

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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