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The role of macroeconomic uncertainty in the determination of the natural rate of interest

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  • Berger, Tino
  • Kempa, Bernd
  • Zou, Feina

Abstract

We incorporate macroeconomic uncertainty into a Holston–Laubach–Williams (HLW)-type model of the natural real interest rate (NRI) for the US., where we allow for nonlinearities by employing a regime-switching model. We find macroeconomic uncertainty to strongly depress the NRI in periods mostly but not exclusively associated with US. recessions. These periods are longer lasting in the 1970s and 1980s and rather short-lived after 1990. Outside these periods, and particularly since the 1990s, we find the level of the NRI to be generally higher in comparison to the estimates by HLW.

Suggested Citation

  • Berger, Tino & Kempa, Bernd & Zou, Feina, 2023. "The role of macroeconomic uncertainty in the determination of the natural rate of interest," Economics Letters, Elsevier, vol. 229(C).
    • Handle: RePEc:eee:ecolet:v:229:y:2023:i:c:s0165176523002161
    DOI: 10.1016/j.econlet.2023.111191
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    More about this item

    Keywords

    Natural rate of interest; Macroeconomic uncertainty; Regime switching;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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