American Economic Review: Vol. 104 No. 5 (May 2014)

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The Natural Rate of Interest and Its Usefulness for Monetary Policy

Article Citation

Barsky, Robert, Alejandro Justiniano, and Leonardo Melosi. 2014. "The Natural Rate of Interest and Its Usefulness for Monetary Policy." American Economic Review, 104(5): 37-43.

DOI: 10.1257/aer.104.5.37

Abstract

We estimate a state-of-the-art DSGE model to study the natural rate of interest in the United States over the last 20 years. The natural rate is highly procyclical, and fell substantially below zero in each of the last three recessions. Although the drop was of comparable magnitude across the three recessions, the decline was considerably more persistent in the Great Recession. We discuss the usefulness and limitations, particularly due to the zero lower bound, of the natural rate for the conduct of monetary policy.

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Authors

Barsky, Robert (Federal Reserve Bank of Chicago and U MI)
Justiniano, Alejandro (Federal Reserve Bank of Chicago)
Melosi, Leonardo (Federal Reserve Bank of Chicago)

JEL Classifications

E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E21: Macroeconomics: Consumption; Saving; Wealth
E22: Capital; Investment; Capacity
E31: Price Level; Inflation; Deflation
E32: Business Fluctuations; Cycles
E43: Interest Rates: Determination, Term Structure, and Effects
E52: Monetary Policy


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