Econometric Issues with Laubach and Williams’ Estimates of the Natural Rate of Interest

@article{Buni2020EconometricIW,
  title={Econometric Issues with Laubach and Williams’ Estimates of the Natural Rate of Interest},
  author={Daniel Bun{\vc}i{\'c}},
  journal={Political Economy - Development: Fiscal & Monetary Policy eJournal},
  year={2020}
}
  • Daniel Bunčić
  • Published 2020
  • Mathematics, Economics
  • Political Economy - Development: Fiscal & Monetary Policy eJournal
  • Holston, Laubach and Williams’ (2017) estimates of the natural rate of interest are driven by the downward trending behaviour of ‘other factor’ z(t) . I show that their implementation of Stock and Watson’s (1998) Median Unbiased Estimation (MUE) to determine the size of λ(z) is unsound. It cannot recover the ratio of interest λ(z) = a_r σ(z) / σ(y~) from MUE required for the estimation of the full structural model. This failure is due to their Stage 2 model being incorrectly specified. More… CONTINUE READING