Lower for Longer: Neutral Rates in the United States

June 24, 2015

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Format: Chicago

Andrea Pescatori, and Jarkko Turunen. Lower for Longer: Neutral Rates in the United States, (USA: International Monetary Fund, 2015) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We use a semi structural model to estimate neutral rates in the United States. Our Bayesian estimation incorporates prior information on the output gap and potential output (based on a production function approach) and accounts for unconventional monetary policies at the ZLB by using estimates of “shadow” policy rates. We find that our approach provides more plausible results than standard maximum likelihood estimates for the unobserved variables in the model. Results show a significant trend decline in the neutral real rate over time, driven only in part by a decline in potential growth whereas other factors (including excess global savings) matter. Neutral rates likely turned negative during the Global Financial Crisis and are expected to increase only gradually looking forward.

Subject: Central bank policy rate, Financial crises, Financial services, Global financial crisis of 2008-2009, Output gap, Potential output, Production, Production growth

Keywords: Central bank policy rate, Equilibrium Policy rate, Global, Global financial crisis of 2008-2009, Monetary policy, Monetary policy stance, Neutral interest rate, Neutral rate, Output gap, Potential output, Production growth, Rate determinant, Rate equation, Rate estimate, Rate gap, Shadow rate, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/135
Stock No:

WPIEA2015135
ISBN:

9781513508382
ISSN:

1018-5941

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