Working Paper: CEPR ID: DP13042
Authors: Gabriele Fiorentini; Alessandro Galesi; Gabriel Prezquirs; Enrique Sentana
Abstract: We document a rise and fall of the natural interest rate (r*) for several advancedeconomies, which starts increasing in the 1960’s and peaks around the end of the1980’s. We reach this conclusion after showing that the Laubach and Williams(2003) model cannot estimate r* accurately when either the IS curve or the Phillipscurve is flat. In those empirically relevant situations, a local level specificationfor the observed interest rate can precisely estimate r*. An estimated Panel ECMsuggests that the temporary demographic effect of the young baby-boomers mostlyaccounts for the rise and fall.
Keywords: natural rate of interest; kalman filter; observability; demographics
JEL Codes: E43; E52; C18; C32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| natural interest rate (r) (E43) | rise and fall across advanced economies (P27) |
| demographic changes (J11) | rise and fall of natural interest rate (r) (E43) |
| risk-related factors (G41) | decline in natural interest rate (r) since the 1990s (E43) |
| flat IS curve (E43) | failure to accurately estimate natural interest rate (r) (E43) |
| flat Phillips curve (E31) | failure to accurately estimate natural interest rate (r) (E43) |
| stationarity in interest rate gap (E43) | better identification of growth and nongrowth components of natural interest rate (r) (E43) |