Finance and Economics Discussion Series (FEDS)

Twitter Share RSS

February 2016

Measuring the Natural Rate of Interest Redux

Thomas Laubach and John C. Williams

Abstract:

Persistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.

Accessible materials (.zip)

Keywords: Econometrics, Money and interest rates

DOI: http://dx.doi.org/10.17016/FEDS.2016.011

PDF: Full Paper

Back to Top
Last Update: June 19, 2020