The Macroeconomic Consequences of Natural Rate Shocks: An Empirical Investigation

Much of the empirical literature on the natural rate of interest has focused on estimating its path. This paper studies the effects of natural rate shocks on output and inflation. It estimates a semi-structural model inspired by the DSGE literature. A decline in the natural rate is found to have a large negative effect on the trend of output and to be contractionary and deflationary in the short run. When the economy is constrained by the zero lower bound (ZLB), these results are consistent with the secular stagnation hypothesis. However, negative natural rate shocks are found to depress the trend of output even outside of the ZLB, calling for a more general theory of secular stagnation.