Discussion paper
DP13042 The Rise and Fall of the Natural Interest Rate
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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