The role of macroeconomic uncertainty in the determination of the natural rate of interest

Abstract

We incorporate macroeconomic uncertainty into a Holston–Laubach–Williams (HLW)-type model of the natural real interest rate (NRI) for the US., where we allow for nonlinearities by employing a regime-switching model. We find macroeconomic uncertainty to strongly depress the NRI in periods mostly but not exclusively associated with US. recessions. These periods are longer lasting in the 1970s and 1980s and rather short-lived after 1990. Outside these periods, and particularly since the 1990s, we find the level of the NRI to be generally higher in comparison to the estimates by HLW.