1. Measuring the Natural Rate of Interest Redux Conference on “The Long Term Equilibrium Interest Rate” October 30, 2015 Thomas Laubach, Federal Reserve Board and John Williams, Federal Reserve Bank of San Francisco The views presented here are those of the authors and not necessarily those of anyone else in the Federal Reserve System.

2. Summary Univariate measures of natural rate of interest (NRI) are unreliable, ignore persistent deviations from stable inflation and potential output. Laubach-Williams (LW) model uses Kalman filter to jointly estimate output gap, trend potential GDP growth, and the natural rate of interest. NRI fell to near zero in 2009 and shows no signs of recovering; robust to alternative model specifications. Monetary policy strategies need to cope with persistently low NRI and high degree of NRI uncertainty. Measuring the Natural Rate of Interest Redux2

3. Defining the Natural Rate “There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tends neither to raise nor to lower them.” Knut Wicksell, 1898 Measuring the Natural Rate of Interest Redux3

4. Determination of the NRI Measuring the Natural Rate of Interest Redux4

5. Univariate Measures of Trend Rates Sizable persistent variation over time Can be distorted by periods of rising or falling inflation (late 1960s; early 1980s) Mechanically implies very low level today Trend component of ex post real short-term rate Measuring the Natural Rate of Interest Redux5

6. The Implicit Natural Rate “The natural rate is an abstraction; like faith, it is seen by its works. One can only say that if the bank policy succeeds in stabilizing prices, the bank rate must have been brought in line with the natural rate, but if it does not, it must not have been.” John H. Williams, 1931 Measuring the Natural Rate of Interest Redux6

7. Laubach-Williams NRI Estimates Measuring the Natural Rate of Interest Redux7

8. The Declining NRI EstimatesChanges in estimates * 199020072015H11990-20072007-15H1 Blue Chip survey3.12.41.2-0.7-1.2 TIPS yields (5-10 years ahead)n/a2.50.9n/a -1.6 Laubach-Williams3.42.1-0.2-1.3-2.3 contribution from trend growth -0.4-1.1 contribution from other factors -0.9-1.2 *Numbers may not sum due to rounding. Measuring the Natural Rate of Interest Redux8

9. Robustness of NRI Estimates Measuring the Natural Rate of Interest Redux9 One-sided estimates of natural rate of interest

10. Is the NRI Permanently Lower? LW estimates show no signs of rebounding. DSGE model estimates assume NRI returns to long-run mean. So far, DSGE estimates show no signs of returning to normal. Measuring the Natural Rate of Interest Redux10 Curdia (2015) DSGE est. of short-run NRI

11. Short-run vs. Long-Run NRI Measuring the Natural Rate of Interest Redux11 One-sided estimates

12. Some Monetary Policy Arithmetic Measuring the Natural Rate of Interest Redux12

13. Measuring the Natural Rate of Interest Redux13

14. Measuring the Natural Rate of Interest Redux14

15. NRI after Financial Crises Measuring the Natural Rate of Interest Redux15