Measuring the Natural Rate of Interest: International Trends and Determinants

Author(s): Kathryn Holston, Thomas Laubach, and John C. Williams

U.S. estimates of the natural rate of interest—the real short-term interest rate that would prevail absent transitory disturbances—have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies—Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

Download PDF (pdf, 426.72 kb)

Computer code for Holston-Laubach-Williams working paper (zip, 288.97 kb)

Real-time estimates (xlsx, 1.15 mb)

Estimates from Holston-Laubach-Williams working paper (xlsx, 117.77 kb)

Article Citation

Holston, Kathryn, Thomas Laubach, and John C. Williams. 2016. "Measuring the Natural Rate of Interest: International Trends and Determinants," Federal Reserve Bank of San Francisco Working Paper 2016-11. Available at https://doi.org/10.24148/wp2016-11