The Natural Rate of Interest in a Nonlinear DSGE Model

Yasuo Hirose, Takeki Sunakawa
2017 Social Science Research Network  
This paper investigates how and to what extent nonlinearities, including the zero lower bound on the nominal interest rate, affect the estimate of the natural rate of interest in a dynamic stochastic general equilibrium model with sticky prices and wages. The estimated natural rate of interest in a nonlinear model is substantially different from that in its linear counterpart because of a contractionary effect of the zero lower bound. Price and wage dispersion, from which a linear model
more » ... inear model abstracts, play a minor role in identifying the natural rate. Abstract This paper investigates how and to what extent nonlinearities, including the zero lower bound on the nominal interest rate, affect the estimate of the natural rate of interest in a dynamic stochastic general equilibrium model with sticky prices and wages. The estimated natural rate of interest in a nonlinear model is substantially different from that in its linear counterpart because of a contractionary effect of the zero lower bound. Price and wage dispersion, from which a linear model abstracts, play a minor role in identifying the natural rate.
doi:10.2139/ssrn.2967137 fatcat:ashjby7s6jaevh3ovbpridqm3q