An estimate of the equilibrium interest rate in the United States and Germany

In most countries the stability objectives of monetary policy are pursued through the control of an interest rate. Thus in the presence of factors that generate inflationary pressure, a central bank tends to tighten monetary conditions to counteract those pressures. To do this, the interest rates controlled by it are set above the value they would have in a neutral or equilibrium scenario. This neutral level is known in the literature as the natural rate of interest or equilibrium interest rate and, although the concept was introduced more than a century ago by Wicksell (1898), it has recently acquired greater relevance, as reflected in theoretical studies on optimum monetary rules and by empirical applications aimed at estimating it. The natural rate of interest is not directly observable and depends on factors, such as the potential growth of the economy or the preference of individuals for future consumption with respect to present consumption (known as the intertemporal discount factor), whose measurement is complex. The literature contains different methods of estimating the natural rate of interest, including those based on the statistical properties of ex-post real interest rates and those that depend on complex economic models of general equilibrium. The results of these studies are, however, rather heterogeneous and difficult to compare. This article presents an estimate of the natural rate of interest based on a methodology that shares elements of the aforementioned approaches, since it combines the exploitation of the statistical properties of series with a simple theoretical economic model. Specifically, in the model, the behaviour of the natural rate of interest depends primarily on changes in the potential growth of the economy, which is estimated subject to the requirement that it be consistent with the periods of growth and recession established by various institutions for the countries considered. This type of approach enables the variability over time of the natural rate of interest to be observed and, as a result, the monetary policy stance to be assessed more accurately than with models in which the natural rate is constant. This methodological feature is particularly important at the present time, when new technologies and demographic developments in the United States and Europe may have affected differently the potential growth, and therefore the natural rate of interest, in the two areas. The article is structured as follows. The following section describes the concept of natural rate and briefly looks at the various empirical approaches available for estimating it. The third section sets forth estimates of the natural rate of interest and of potential growth in the United States and Germany in the period 1964-2003, analyses the changes in its level and volatility in recent decades and assesses the monetary policy stance of the two areas in the light of the results obtained. Finally, the last section presents the main conclusions of this work.