In 2014, Lawrence Summers used estimates of equilibrium real interest rates based on the Laubach-Williams model as evidence for a secular stagnation. Federal Reserve Chair Janet Yellen justified zero-rate policy in a speech in March 2015, referring to the equilibrium real interest rates in the medium term.
According to Robert Beyer and Volker Wieland, estimates of equilibrium real interest rates should not be applied to monetary policy and are very questionable. In this working paper, the authors investigate the estimates for the United States, Germany and the euro area coming to the conclusion that estimates based on the Laubach-Williams model are very problematic. Even relatively small changes in the assumptions for the econometric specification or in the data used lead to economically relevant changes of the estimates, the authors write. The Laubach-Williams model was trying to estimate various variables. Therefore, current estimates close to zero should not be used as a basis for important monetary or fiscal policy decisions.
IMFS Working Paper No. 100
Robert C. M. Beyer und Volker Wieland
Schätzung des mittelfristigen Gleichgewichtszinses in den Vereinigten Staaten, Deutschland und dem Euro-Raum mit der Laubach-Williams-Methode
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