Instability, imprecision and inconsistent use of equilibrium real interest rate estimates

  • The debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. In particular, this concerns estimates derived from a simple aggregate demand and Phillips curve model with time-varying components as proposed by Laubach and Williams (2003). For example, Summers (2014a) refers to these estimates as important evidence for a secular stagnation and the need for fiscal stimulus. Yellen (2015, 2017) has made use of such estimates in order to explain and justify why the Federal Reserve has held interest rates so low for so long. First, we re-estimate the United States equilibrium rate with the methodology of Laubach and Williams (2003). Then, we build on their approach and an alternative specification to provide new estimates for the United States, Germany, the euro area and Japan. Third, we subject these estimates to a battery of sensitivity tests. Due to the great uncertainty and sensitivity that accompany these equilibrium rate estimates, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if these estimates are employed to determine the appropriate monetary policy stance, such estimates are better used together with the consistent estimate of the level of potential output.

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Author:Robert BeyerGND, Volker WielandORCiDGND
Parent Title (English):Journal of international money and finance
Place of publication:Amsterdam
Document Type:Article
Date of Publication (online):2019/02/13
Date of first Publication:2019/02/02
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2023/10/23
Page Number:14
First Page:1
Last Page:14
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoCreative Commons - CC BY - Namensnennung 4.0 International