Series: Working Papers. 1822.
Author: Gabriele Fiorentini, Alessandro Galesi, Gabriel Pérez-Quirós and Enrique Sentana.
Topics: Quantitative methods | Interest rates | Economic growth and convergence | Uncertainty | Population and ageing.
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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.