Lower for Longer : Neutral Rates in the United States

We use a semi structural model to estimate neutral rates in the United States. OurBayesian estimation incorporates prior information on the output gap and potential output(based on a production function approach) and accounts for unconventional monetarypolicies at the ZLB by using estimates of "shadow" policy rates. We find that ourapproach provides more plausible results than standard maximum likelihood estimates forthe unobserved variables in the model. Results show a significant trend decline in theneutral real rate over time, driven only in part by a decline in potential growth whereasother factors (including excess global savings) matter. Neutral rates likely turned negativeduring the Global Financial Crisis and are expected to increase only gradually lookingforward.