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
Key Findings
- 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
Implications
- 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
Additional Notes
- 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