Lower for Longer: Neutral Rates in the United States

Pescatori, Andrea; Turunen, Jarkko

doi:10.5089/9781513508382.001

Cited by 50 publications

(51 citation statements)

References 21 publications

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“…Although economic theory provides insights into the various factors affecting the natural rate of interest (see, for example, Congressional Budget Office 2014; International Monetary Fund 2014; Council of Economic Advisers 2015; Eggertsson et al 2015;Rachel and Smith 2015;Pescatori and Turunen 2015;Hall 2016), measurement of the natural rate of interest has proven more challenging. This arises because the natural rate, like other latent variables, must be inferred from the data rather than directly observed.…”

Section: Introductionmentioning

confidence: 99%

Measuring the Natural Rate of Interest: International Trends and Determinants

Holston¹,

Laubach

Williams

2016

FEDS

173

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U.S. estimates of the natural rate of interest -the real short-term interest rate that would prevail absent transitory disturbances -have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies -Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

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Section: Introductionmentioning

confidence: 99%

Measuring the Natural Rate of Interest: International Trends and Determinants

Holston¹,

Laubach

Williams

2016

FEDS

173

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“…This is not in line with the empirical evidence based on forward rates, future rates (in particular federal funds futures) and VAR models. of interest rates (Pescatori and Turunen, 2015;Hamilton and others, 2015).…”

Section: Introductionmentioning

confidence: 99%

Demographics and the Behavior of Interest Rates

2016

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Interest rates are very persistent. Modelling the persistent component of interest rates has important consequences for forecasting. Factor models of the term structure are restricted VAR models that project over a long-horizon the one-period risk free rate to obtain yields at longer horizon as the sum of the expected future monetary policy and the term premia. The included factors are typically mean reverting and the equilibrium real rates are considered constant (think, for example, of the standard Taylor-rule), partial adjustments to equilibrium yields are then used to rationalize the persistence in observed data. As a result the empirical models feature a very high level of persistence that makes long-horizon predictions inherently inaccurate. This paper relates the common persistent component of the U.S. term structure of interest rates to the age composition of population. The composition of age structure determines the equilibrium rate in the monetary policy rule and therefore the persistent component in one-period yields. Fluctuations in demographics are then transmitted to the whole term structure via the expected policy rate components. We build an a¢ ne term structure model (ATSM) which exploits demographic information to capture the dynamics of yields and produce useful forecasts of bond yields and excess returns that provides economic value for long-term investors.

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“…On the contrary, DSGE models impose too strong theoretical restrictions that are more prone to misspecification, especially in the presence of near-nonstationarity in observed real rates (Pescatori and Turunen, 2015). Besides, neutral interest rates derived through DSGE models can vary substantially, depending on the specific assumptions in the model.…”

Section: Literature Reviewmentioning

confidence: 99%

“…In our assessment of the long-run real exchange rate (LR RER) trend with the US, we rely heavily on Phillips et al (2013), which introduces the External Balance Assessment methodology developed by the IMF's Research Department. We use coefficients from Table 5 of the paper to link LR RER appreciation with projections of changes in certain macroeconomic variables.…”

Section: Trend Of the Real Exchange Ratementioning

confidence: 99%

A Neutral Real Interest Rate in the Case of a Small Open Economy: Application to Ukraine

Grui¹,

Lepushynskyi²,

Nikolaychuk³

2018

Visn. Nat. Bank Ukr.

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This paper measures a neutral interest rate in Ukraine by means of applying a Kalman filter to a semistructural model with unobserved components. We rely on a medium-term concept of a neutral interest rate, where it is defined as a real interest rate consistent with output at its potential level and inflation at its target level after the effects of all cyclical shocks have disappeared. Under this concept, and accounting for the small open nature of Ukrainian economy, the neutral interest rate is determined by the global economy's cost of capital and domestic long-term factors that influence risk-premium and changes in the real exchange rate. Conditional on long-term forecasts for output, demographic trends, real exchange rate changes and risk premium, the neutral rate is projected to decrease gradually from its 2.5% level as of the beginning of 2018 to 2% in real terms, or to 7% in nominal terms under a 5% inflation target. However, in the following years the gap between the National Bank of Ukraine's policy rate and the neutral rate should remain positive -reflecting the tight monetary stance needed to ensure stable disinflation. JEL Codes C32, E43, E52

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Lower for Longer: Neutral Rates in the United States

Cited by 50 publications

References 21 publications

Measuring the Natural Rate of Interest: International Trends and Determinants

Measuring the Natural Rate of Interest: International Trends and Determinants

Demographics and the Behavior of Interest Rates

A Neutral Real Interest Rate in the Case of a Small Open Economy: Application to Ukraine

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