Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest

56 Pages Posted: 27 Oct 2020 Last revised: 11 Jan 2022

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Date Written: October, 2020

Abstract

I investigate the downward drift of U.S. interest rates from 1984:Q1 to 2019:Q4. For this, I bring the workhorse two-country New Keynesian model to data on the U.S. and an aggregate of its major trading partners using Bayesian techniques. I show that the U.S. natural (or equilibrium) interest rate recovered from the model has fallen more gradually than the long-run U.S. real rate, cushioned by productivity shocks. Since inflation expectations became well-anchored in the ‘90s, this implies that the continued interest rate decline is largely explained by the real rate tracking the natural rate downward. Foreign productivity spillovers have had significant effects on the U.S. natural rate and on U.S. output potential. However, foreign shock propagation contributed little to the upswing in U.S. output relative to potential or to sustaining inflation close to target, both of which are attributed almost entirely to mark-up compression (cost-push shocks) and an accommodative monetary policy in the U.S.

JEL Classification: F41, F42, E12, E52, C11

Suggested Citation

Martinez-Garcia, Enrique, Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest (October, 2020). Globalization Institute Working Paper No. 403, Available at SSRN: https://ssrn.com/abstract=3717948 or http://dx.doi.org/10.24149/gwp403r1

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

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