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Economic Brief

October 2015, No. 15-10

Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches

Thomas A. Lubik and Christian Matthes

The natural rate of interest is a key concept in monetary economics because its level relative to the real rate of interest allows economists to assess the stance of monetary policy. However, the natural rate of interest cannot be observed; it must be calculated using identifying assumptions. This Economic Brief compares the popular Laubach-Williams approach to calculating the natural rate with an alternative method that imposes fewer theoretical restrictions. Both approaches indicate that the natural rate has been above the real rate for a long time.

Additional Resources

Fabiani, Silvia, and Ricardo Mestre, "A System Approach for Measuring the Euro Area NAIRU," Empirical Economics, May 2004, vol. 29, no. 2, pp. 311-341. (A working paper version is available online.)

Laubach, Thomas, and John C. Williams, "Measuring the Natural Rate of Interest," Review of Economics and Statistics, November 2003, vol. 85, no. 4, pp. 1063-1070. A working paper version is available online. Also, Laubach and Williams' updated estimates are available online.

Lubik, Thomas A., and Jessie Romero, "Monetary Policy with Unknown Natural Rates," Federal Reserve Bank of Richmond Economic Brief, July 2011, No. 11-07.

Lubik, Thomas A., and Stephen Slivinski, "Is the Output Gap a Faulty Gauge for Monetary Policy?" Federal Reserve Bank of Richmond Economic Brief, January 2010, No. 10-01.

Primiceri, Giorgio E., "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, July 2005, vol. 72, no. 3, pp. 821-852. (A working paper version is available online.)

Wicksell, Knut, Interest and Prices: A Study of the Causes Regulating the Value of Money, 1898. English translation, London: Macmillan and Company, 1936.

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