Measuring the Natural Rate of Interest: International Trends and Determinants

Holston, Kathryn; Laubach, Thomas; Williams, John C.

doi:10.24148/wp2016-11

Cited by 47 publications

(52 citation statements)

References 20 publications

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“…Laubach and Williams (2015) estimate a neutral nominal federal funds rate of 2 percent, well below Taylor's (1993) estimate of 4 percent. Holston, Laubach, and Williams (2016) extend the approach to look at Canada, the eurozone, and the United Kingdom and find similar declines in the neutral policy rate. Even allowing for some reversion to the mean in global real interest rates, Federal Reserve chair Janet Yellen (2016) has suggested that a neutral Fed Funds rate (a rate consistent with full employment and the Fed's 2 percent inflation target) will likely land around 3 percent.…”

Section: The Sharp Fall In Nominal Central Bank Policy Interest Ratesmentioning

confidence: 99%

“…But most of the action has come in the collapse of the equilibrium short-term real (inflation-adjusted) interest rate, which is now closer to -1 percent on average across the advanced countries than to Taylor's (1993) +2 percent (Holston, Laubach, and Williams 2016). For example, the interest rate on a 10-year inflation-indexed Treasury security fell from 2.7 percent before the financial crisis to almost -0.9 percent at the end of 2012; it rose subsequently, but by early March 2017 was still only 0.5 percent.…”

Section: The Sharp Fall In Nominal Central Bank Policy Interest Ratesmentioning

confidence: 99%

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Dealing with Monetary Paralysis at the Zero Bound

Rogoff

2017

Journal of Economic Perspectives

103

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Despite an outward appearance of stability, the core of the global monetary system today is immersed in a level of intellectual turmoil not seen since the breakup of the Bretton Woods system in the early 1970s. Back then, it was the system of fixed exchange rates that constrained central banks (except for the United States at the center). More recently, the key constraint for central banks is the zero lower bound on nominal interest rates. The zero bound has its roots in a diverse range of frictions but is due above all to the fear of central banks that if they push the short-term policy interest rates, which they set, too deeply negative, there will be a massive flight into paper currency. Cash, of course, pays no interest, positive or negative. This paper asks whether, in a world where paper currency is becoming increasingly vestigial outside small transactions (at least in the legal, taxcompliant economy), there might exist relatively simple ways to finesse the zero bound without affecting how most ordinary people live. Surprisingly, this topic has been relatively obscure during the past decade compared to the massive number of articles, well-represented in top journals, that take the zero bound as given and look for out-of-the-box solutions for dealing with it. In an inversion of the old joke, it is a bit as if the economics literature has insisted on positing "assume we don't have a can opener," without considering the possibility that we might be able to devise one.

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Section: The Sharp Fall In Nominal Central Bank Policy Interest Ratesmentioning

confidence: 99%

Section: The Sharp Fall In Nominal Central Bank Policy Interest Ratesmentioning

confidence: 99%

Dealing with Monetary Paralysis at the Zero Bound

Rogoff

2017

Journal of Economic Perspectives

103

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“…Our estimation shows deeper drops during recessions, with subsequently larger increases during recoveries, than the estimates obtained from maximum likelihood methods. Our median path of the natural rate also shows a different trajectory since the end of the Great Recession, and we obtain an increase since the trough in 2008, in contrast to the "non-recovery" displayed of the U.S. estimate in Holston, Laubach, and Williams (2016).…”

mentioning

confidence: 77%

“…By incorporating the uncertainty of estimating all the parameters jointly in a single step under uninformative priors-but using the Holston, Laubach, and Williams (2016) model specification-we obtain richer time-series dynamics of r * . Our estimation shows deeper drops during recessions, with subsequently larger increases during recoveries, than the estimates obtained from maximum likelihood methods.…”

mentioning

confidence: 99%

Measuring the Natural Rate of Interest: Alternative Specifications

Lewis

Vazquez-Grande

2017

FEDS

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We build on the work of Laubach and Williams (2003) and subsequent studies by analyzing the effect on the estimates of the natural rate of interest (r * ) of accounting for full parameter uncertainty and alternative specifications for the underlying components of the natural rate. Our estimation technique delivers richer time-series dynamics for the median estimate of r * within the Laubach and Williams model. Additionally, we find that models with transitory shocks to the non-growth component of the natural rate have a higher marginal likelihood and produce an upward-sloping post-crisis trajectory of the r * path and thus a higher recent median point estimate (1.8% in 2016:Q3).JEL: C32, E43, E52, O40

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“…Discussions of the decline in r * include Summers (2014), Rachel and Smith (2015), Hamilton et al (2016), Holston et al (2017), Del Negro et al (2017), and many others. In the macroeconomics literature, r * t is often labeled the neutral or natural rate of interest although, as noted below, there are various definitions with subtle differences.…”

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confidence: 99%

Interest Rates Under Falling Stars

Bauer

Rudebusch

2019

ERWP

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While theory predicts that the equilibrium real interest rate, r * t , and the perceived trend in inflation, π * t , are fundamental determinants of the yield curve, macro-finance models generally treat them as constant. We show that accounting for time-varying macro trends is critical for understanding the empirical dynamics of U.S. Treasury yields and risk pricing. It fundamentally changes estimated risk premiums in long-term bond yields, leads to large gains in predictions of excess bond returns and long-range out-of-sample forecasts of interest rates, and captures a substantial share of interest rate variability at low frequencies.

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Measuring the Natural Rate of Interest: International Trends and Determinants

Cited by 47 publications

References 20 publications

Dealing with Monetary Paralysis at the Zero Bound

Dealing with Monetary Paralysis at the Zero Bound

Measuring the Natural Rate of Interest: Alternative Specifications

Interest Rates Under Falling Stars

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