Estimating the Natural Rate of Interest in Real Time

This dissertation consists of two parts. In the first part I introduce a new data set of quarterly vintages of real-time estimates of the natural rate of interest and evaluate the reliability of these estimates for a range of empirical models commonly used in the literature. This data, going back to the early 1980s, enables a previously unexplored evaluation of policy rules with time-varying natural rates of interest estimated in real-time. In particular, I investigate how real-time estimates of the natural rate of interest are revised in subsequent quarters. I find that ex-post revisions of real-time estimates of the natural rate of interest are smaller than revisions of the output gap because revisions of different components of the natural rate of interest partly offset each other. Hence, policy mistakes originating from the use of these estimates in interest rate rules are less severe than miscalculations introduced by real-time estimates of other variables that are used by policymakers in interest rate rules.

The second part studies the performance of the monetary policy rules which incorporate real-time estimates of the natural rate of interest. I conclude that interest rate rules with real-time estimates of the natural rate of interest describe historic policy choices relatively well. Optimized policy rules indicate that, if policymakers had followed a simple interest rate rule that incorporated these estimates, post-crisis macroeconomic performance could have been improved relative to the actual monetary policy stance.