# 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} }

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

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