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Preview of Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches (PDF)
🔗 Source: richmondfed.org
📊 Size: 323 KB
👤 Author: Thomas A. Lubik and Christian Matthes
⬇️ Downloads: 118

Summary

The natural rate of interest is a key concept in monetary economics, defined as the interest rate compatible with a stable price level. An increase in the interest rate above its natural rate contracts economic activity, while a decline has the opposite effect. The natural rate is unobservable and must be calculated using identifying assumptions. The Laubach-Williams approach is a commonly used method, which uses a state-space model to calculate the natural rate from actual data. However, this approach has limitations, and alternative methods, such as the time-varying parameter vector autoregressive (TVP-VAR) model, can provide different estimates. Both approaches indicate that the natural rate has been above the real rate for a long time, suggesting that monetary policy is not tight enough.

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The natural rate of interest is a key concept in monetary economics, defined as the interest rate compatible with a stable price level.

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  • File Format: PDF
  • File Size: 323 KB
  • Pages: 6
  • Language: EN
  • Author: Thomas A. Lubik and Christian Matthes
  • Total Downloads: 118
  • Last Updated: 2 months ago

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