[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/fip/fedbcq/2017_006.html
   My bibliography  Save this paper

The equilibrium real policy rate through the lens of standard growth models

Author

Listed:
  • Daniel E. Sichel
  • J. Christina Wang
Abstract
The long-run equilibrium real policy rate is a key concept in monetary economics and an important input into monetary policy decision-making. It has gained particular prominence lately as the Federal Reserve continues to normalize monetary policy. In this study, we assess the evolution, current level, and prospective values of this equilibrium rate within the framework of standard growth models. Our analysis considers as a baseline the single-sector Solow model, but it places more emphasis on the multi-sector neoclassical growth model, which better fits the data over the past three decades. We find that the long-run equilibrium policy rate has fallen between 0.3 and more than 1.6 percentage points from the 1973?2007 historical average, depending on the model and parameter values, mainly because of slower growth in total factor productivity (TFP) and the labor force. To the extent that the recent sluggish TFP growth persists, our estimates suggest a range of 0 percent to 1 percent for the equilibrium real rate in the current policy setting. But these estimates are subject to a substantial degree of uncertainty, as has been found in other studies. Policymakers thus need to interpret cautiously the guidance from policy rules that depend on the long-run equilibrium rate. This uncertainty also highlights the importance of the Federal Reserve?s standard practice of constantly monitoring a wide range of indicators of inflation and real activity to gauge as accurately as possible the economy?s reaction to policy.

Suggested Citation

  • Daniel E. Sichel & J. Christina Wang, 2017. "The equilibrium real policy rate through the lens of standard growth models," Current Policy Perspectives 17-6, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbcq:2017_006
    as

    Download full text from publisher

    File URL: https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2017/cpp1706.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://www.bostonfed.org/publications/current-policy-perspectives/2017/the-equilibrium-real-policy-rate-through-the-lens-of-standard-growth-models.aspx
    File Function: Summary
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. John G. Fernald, 2015. "Productivity and Potential Output before, during, and after the Great Recession," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 1-51.
    2. Guvenen, Fatih, 2006. "Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1451-1472, October.
    3. repec:cbo:report:523702 is not listed on IDEAS
    4. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
    5. Congressional Budget Office, 2017. "An Update to the Budget and Economic Outlook: 2017 to 2027," Reports 52801, Congressional Budget Office.
    6. repec:cbo:report:523701 is not listed on IDEAS
    7. Congressional Budget Office, 2017. "The Budget and Economic Outlook: 2017 to 2027," Reports 52370, Congressional Budget Office.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Josh Bivens, 2017. "A ‘High-Pressure Economy’ Can Boost Productivity," Challenge, Taylor & Francis Journals, vol. 60(5), pages 405-423, September.
    2. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2017. "The productivity slowdown and the declining labor share: a neoclassical exploration," CEP Discussion Papers dp1504, Centre for Economic Performance, LSE.
    3. Rod Tyers & Yixiao Zhou, 2023. "Automation and inequality with taxes and transfers," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(1), pages 68-100, February.
    4. John C. Williams, 2017. "The Perennial Problem of Predicting Potential," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    5. Fatás, Antonio & Summers, Lawrence H., 2018. "The permanent effects of fiscal consolidations," Journal of International Economics, Elsevier, vol. 112(C), pages 238-250.
    6. Richard V. Burkhauser & Kevin Corinth & Douglas Holtz-Eakin, 2021. "Policies to Help the Working Class in the Aftermath of COVID-19: Lessons from the Great Recession," The ANNALS of the American Academy of Political and Social Science, , vol. 695(1), pages 314-330, May.
    7. Kan Chen & Nathaniel Karp, 2018. "Natural interest rates in the U.S., Canada and Mexico," Working Papers 18/07, BBVA Bank, Economic Research Department.
    8. Michalis Nikiforos & Gennaro Zezza, 2017. "The Trump Effect: Is This Time Different?," Economics Strategic Analysis Archive sa_apr_17, Levy Economics Institute.
    9. Robert G. Murphy, 2019. "Can the Phillips Curve Explain Inflation over the Past Half-Century?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(2), pages 137-149, May.
    10. Canofari, Paolo & Marini, Giancarlo & Piergallini, Alessandro, 2020. "Financial Crisis and Sustainability of US Fiscal Deficit: Indicators or Tests?," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 192-204.
    11. Congressional Budget Office, 2018. "CBO’s Projection of Labor Force Participation Rates: Working Paper 2018-04," Working Papers 53616, Congressional Budget Office.
    12. John C. Williams, 2017. "What’s the Future of Interest Rates? The Answer’s in the Stars," Speech 183, Federal Reserve Bank of San Francisco.
    13. Tomaz Cajner & Tyler Radler & David Ratner & Ivan Vidangos, 2017. "Racial Gaps in Labor Market Outcomes in the Last Four Decades and over the Business Cycle," Finance and Economics Discussion Series 2017-071, Board of Governors of the Federal Reserve System (U.S.).
    14. John C. Williams, 2017. "The Global Growth Slump: Causes & Consequences," Speech 180, Federal Reserve Bank of San Francisco.
    15. Gene Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2018. "The Productivity Slowdown and the Declining Labor Share," 2018 Meeting Papers 169, Society for Economic Dynamics.
    16. John C. Williams, 2017. "The Global Growth Slump: Causes and Consequences," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    17. Maria Ana Matias & Rita Santos & Panos Kasteridis & Katja Grasic & Anne Mason & Nigel Rice, 2022. "Approaches to projecting future healthcare demand," Working Papers 186cherp, Centre for Health Economics, University of York.
    18. Xiuping Ji & Feiran Dong & Chen Zheng & Naipeng Bu, 2022. "The Influences of International Trade on Sustainable Economic Growth: An Economic Policy Perspective," Sustainability, MDPI, vol. 14(5), pages 1-15, February.
    19. Salvatore, Dominick, 2020. "Growth and trade in the United States and the world economy: Overview," Journal of Policy Modeling, Elsevier, vol. 42(4), pages 750-759.
    20. Chakraborty, Shankha & Papageorgiou, Chris & Pérez Sebastián, Fidel, 2010. "Diseases, infection dynamics, and development," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 859-872, October.

    More about this item

    Keywords

    monetary policy; productivity; natural rate of interest; growth models;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedbcq:2017_006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Spozio (email available below). General contact details of provider: https://edirc.repec.org/data/frbbous.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.