The Natural Rate of Interest in a Nonlinear DSGE Model

This paper investigates how and to what extent nonlinearity, including the zero lower
bound on the nominal interest rate, affects the estimates of the natural rate of interest in
a dynamic stochastic general equilibrium model with sticky prices and wages. We
find that 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, and that other nonlinearities such as price and wage dispersion, from
which a linear model abstracts, play a minor role in identifying the natural rate.