Measuring the Natural Rate of Interest - International Trends and Determinants

Authors	Kathryn Holston, Thomas Laubach, John C Williams
DOI	https://doi.org/10.1016/j.jinteco.2017.01.004
Publisher
Location	https://divine-mercy.tail718aa.ts.net:8000/Literature%20Review/Measuring%20the%20natural%20rate%20of%20interest-%20International%20trends%20and%20determinants.pdf

Methodology and Data

The paper estimates natural rates of interest, output, and trend growth for four economies: Canada, Euro Area, UK, and US
It uses a version of the Laubach-Williams (2003) model, applying the Kalman filter to data on real GDP, inflation, and short-term interest rates
The sample period is 1961-2016 for most economies, starting in 1972 for the Euro Area

Estimated natural rates of interest exhibit significant variation over time in all four economies
There has been a substantial decline in natural rates over the past 25 years, reaching historically low levels recently
Much of the decline is explained by falling trend GDP growth rates
Natural rate estimates are highly imprecise, especially for the Euro Area and UK
There is evidence of co-movement in natural rates and trend growth across the four economies, suggesting an important role for global factors

The findings suggest declining natural rates are an international phenomenon driven by global factors
Very low natural rates, if sustained, have profound implications for monetary policy:
- Episodes of hitting the zero lower bound may become more frequent and prolonged
- International spillovers and benefits from policy coordination may increase

The paper compares its estimates to other studies and finds general agreement on the declining trend
It suggests more research taking an international perspective on natural rates is needed
The imprecision of estimates is highlighted as an important caveat to the findings