Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy

We estimate the natural rate of interest (r*) using a semi-structural model of the U.S. economy that jointly characterizes the trend and cyclical factors of key macroeconomic variables such as output, the unemployment rate, inflation, and short- and long-term interest rates. We specify a monetary policy rule and an equation that characterizes the 10-year Treasury yield to exploit the information provided by both interest rates to infer r*. However, the use of a monetary policy rule with a sample that spans the Great Recession and its aftermath poses a challenge because of the effective lower bound. We devise a Bayesian estimation technique that incorporates a Tobit-like specification to deal with the censoring problem. We compare and validate our model specifications using pseudo out-of-sample forecasting exercises and Bayes factors. Our results show that the smoothed value of r* declined sharply around the Great Recession, eventually falling below zero, and has remained negative since then. Our results also indicate that obviating the censoring would imply higher estimates of r* than otherwise.