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Natural rates across the Atlantic

Author

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  • Neri, Stefano
  • Gerali, Andrea
Abstract
A closed-economy medium-scale model is estimated for the United States and the euro-area to assess the current level of the natural rate of interest and shed light on its drivers over the last decades. The model features a rich set of shocks that bear some connection with the explanations put forward in the literature to explain the secular downward trend in interest rates. The analysis shows that the natural rate has declined over the past decades, contributing to lowering nominal and real rates. Risk premium shocks, short-cut for changes in agents’ preference for safe assets, have been the main driver in the euro area. In the United States, shocks to the efficiency of investment, which may capture the functioning of the financial sector, and to the risk premium have played a major role. These differences between the two economies underscore the importance of adopting a structural model with a rich stochastic structure.

Suggested Citation

  • Neri, Stefano & Gerali, Andrea, 2019. "Natural rates across the Atlantic," Journal of Macroeconomics, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:jmacro:v:62:y:2019:i:c:s0164070417304652
    DOI: 10.1016/j.jmacro.2018.04.007
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    More about this item

    Keywords

    Natural rate of interest; Monetary policy; DSGE model; Bayesian methods;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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