The Natural Rate of Interest in a Nonlinear DSGE Model

Vol: 
CAMA Working Paper 38/2017
Author name: 
Yasuo Hirose
Takeki Sunakawa
Year: 
2017
Month: 
May
Abstract: 

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.

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