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Using the Natural Rate Concept to Assess the Consistency of Projections Ten Years Ahead for Real Interest Rates and Inflation: Technical Paper 2004-05

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  • Angelo Mascaro

Abstract

The concept of the "natural" long-term interest rate, a rate that is determined by the underlying production capability of the economy, provides a way to check the internal consistency of medium-term economic projections. Forecasters who use a neoclassical growth model to project the level of real Gross Domestic Product, as does the Congressional Budget Office, are implicitly projecting the natural rate, because the growth model simulates the production capability of the economy. The assumptions that are embedded in the growth model can be used to

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  • Angelo Mascaro, 2004. "Using the Natural Rate Concept to Assess the Consistency of Projections Ten Years Ahead for Real Interest Rates and Inflation: Technical Paper 2004-05," Working Papers 15469, Congressional Budget Office.
    • Handle: RePEc:cbo:wpaper:15469
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    1. Robert C. Merton, 1975. "An Asymptotic Theory of Growth Under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(3), pages 375-393.
    2. Angelo Mascaro, 2003. "Using the Treasury Nominal and Inflation-Indexed Spread to Estimate Expected Long-Run Changes in the CPI-U under Inflation Uncertainty, Risk Aversion, and the Probability of Deflation: Technical Paper," Working Papers 14933, Congressional Budget Office.
    3. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    4. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
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