Must-Read: Thomas Laubach and John C. Williams: Measuring the Natural Rate of Interest Redu

Must-Read: If our estimates of the real natural rate of interest are that it is less than zero, and if inflation is below target, what is the argument for even talking about raising interest rates? Isn’t the argument that ought to be made that one should raise the inflation target? One does want to have a late-expansion nominal federal funds rate of at least 6%/year, does one not?

Thomas Laubach and John C. Williams: Measuring the Natural Rate of Interest Redux: “Persistently low real interest rates have prompted the question…

…whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.

Www frbsf org economic research files wp2015 16 pdf Www frbsf org economic research files wp2015 16 pdf

October 30, 2015

AUTHORS:

Brad DeLong
Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch