(Un)Naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate

52 Pages Posted: 17 Aug 2007

See all articles by Marco J. Lombardi

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Silvia Sgherri

International Monetary Fund (IMF)

Date Written: August 2007

Abstract

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

Lombardi, Marco Jacopo and Sgherri, Silvia, (Un)Naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate (August 2007). ECB Working Paper No. 794, Available at SSRN: https://ssrn.com/abstract=1003969

Marco Jacopo Lombardi (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Silvia Sgherri

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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