June 2017 (Revised August 2018)

Measuring the Natural Rate of Interest: A Note on Transitory Shocks

Kurt F. Lewis and Francisco Vazquez-Grande


We present evidence that the natural rate of interest is buffeted by both permanent and transitory shocks. We establish this result by estimating a benchmark model with Bayesian methods and loose priors on the unobserved drivers of the natural rate. When subject to transitory shocks, the median estimate for the U.S. economy is more procyclical, displays a less marked secular decline, and is therefore higher following the Great Recession than most estimates in the literature.

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Keywords: natural rate of interest, monetary policy, Kalman filter, pileup, trend growth

DOI: https://doi.org/10.17016/FEDS.2017.059r1

PDF: Full Paper

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Last Update: January 09, 2020