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Measuring the Natural Rate of Interest Redux

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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.

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Acknowledgements

The authors would like to thank Ben Pyle for excellent research assistance.

Authors
  1. Thomas Laubach
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  2. John C Williams
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Disclaimer:

The views expressed here are solely those of the authors and do not necessarily reflect those of the Board of Governors of the Federal Reserve System or others in the Federal Reserve System.

*Thomas Laubach is Director of the Division of Monetary Affairs at the Board of Governors of the Federal Reserve System. John C. Williams is President and Chief Executive Officer of the Federal Reserve Bank of San Francisco.

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Laubach, T., Williams, J. Measuring the Natural Rate of Interest Redux. Bus Econ 51, 57–67 (2016). https://doi.org/10.1057/be.2016.23

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