On a standard Method for Measuring the Natural Rate of Interest

41 Pages Posted: 2 Dec 2020 Last revised: 30 Mar 2021

See all articles by Daniel Buncic

Daniel Buncic

Stockholm University - Stockholm Business School

Date Written: March 30, 2021


This paper corrects the implementation of Median Unbiased Estimation (MUE) in Stage 2 of Holston, Laubach and Williams’ (2017) framework to estimate the natural rate of interest and provides corresponding corrected estimates. The correction is quantitatively important. It yields substantially smaller point estimates of the signal-to-noise ratio parameter λ(z) which determines the size of the downward trend of ‘other factor’ z(t) in the natural rate. For US data, the point estimate of λ(z) shrinks from 0.040 to 0.013 and is statistically highly insignificant. For data on the Euro Area, the UK and Canada, the λ(z) point estimates are exactly zero. Natural rate estimates from this model are up to 100 basis points larger than originally computed by Holston et al. (2017).

Keywords: Natural rate of interest, Median Unbiased Estimation, Kalman Filter, misspecified econometric models, correction to Stage 2 model.

JEL Classification: C32, E43, E52, O40

Suggested Citation

Buncic, Daniel, On a standard Method for Measuring the Natural Rate of Interest (March 30, 2021). Available at SSRN: https://ssrn.com/abstract=3725151 or http://dx.doi.org/10.2139/ssrn.3725151

Daniel Buncic (Contact Author)

Stockholm University - Stockholm Business School


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