(Un)Naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate
52 Pages Posted: 17 Aug 2007
Date Written: August 2007
Following the 2000 stockmarket crash, have US interest rates been held too low in relation to their natural level? Most likely, yes. Using a structural neo-Keynesian model, this paper attempts a real-time evaluation of the US monetary policy stance while ensuring consistency between the specification of price adjustments and the evolution of the economy under flexible prices. To do this, the model's likelihood function is evaluated using a Sequential Monte Carlo algorithm providing inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Tracking down the evolution of underlying stochastic processes in real time is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data.
Keywords: Natural Interest Rate, DSGE Models, Bayesian Analysis, Particle Filters
JEL Classification: E43, C11, C15
Suggested Citation: Suggested Citation