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Title: The Rise and Fall of the Natural Interest Rate

Author(s): Gabriele Fiorentini, Alessandro Galesi, Gabriel Pérez-Quirós and Enrique Sentana

Publication Date: July 2018

Keyword(s): demographics, Kalman filter, Natural rate of interest and observability

Programme Area(s): International Macroeconomics and Finance

Abstract: We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960's and peaks around the end of the 1980'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 Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.

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Bibliographic Reference

Fiorentini, G, Galesi, A, Pérez-Quirós, G and Sentana, E. 2018. 'The Rise and Fall of the Natural Interest Rate'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13042