arXiv 26 Feb 2020 · Econometrics · 3 citations (OpenAlex)
arXiv:2002.11583 · PDF · DOI · OpenAlex · Extracted main text
Holston, Laubach and Williams' (2017) estimates of the natural rate of interest are driven by the downward trending behaviour of 'other factor' $z_{t}$. I show that their implementation of Stock and Watson's (1998) Median Unbiased Estimation (MUE) to determine the size of the $\lambda _{z}$ parameter which drives this downward trend in $z_{t}$ is unsound. It cannot recover the ratio of interest $\lambda _{z}=a_{r}\sigma _{z}/\sigma _{\tilde{y}}$ from MUE required for the estimation of the full structural model. This failure is due to an 'unnecessary' misspecification in Holston et al.'s (2017) formulation of the Stage 2 model. More importantly, their implementation of MUE on this misspecified Stage 2 model spuriously amplifies the point estimate of $\lambda _{z}$. Using a simulation experiment, I show that their procedure generates excessively large estimates of $\lambda _{z}$ when applied to data generated from a model where the true $\lambda _{z}$ is equal to zero. Correcting the misspecification in their Stage 2 model and the implementation of MUE leads to a substantially smaller $\lambda _{z}$ estimate, and with this, a more subdued downward trending influence of 'other factor' $z_{t}$ on the natural rate. Moreover, the $\lambda _{z}$ point estimate is statistically highly insignificant, suggesting that there is no role for 'other factor' $z_{t}$ in this model. I also discuss various other estimation issues that arise in Holston et al.'s (2017) model of the natural rate that make it unsuitable for policy analysis.
appendix boundary found by none_found · 100% of the source is main text. Read the extracted text to check this.
The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Holston, Kathryn, Thomas Laubach and John C. Williams (2017) Measuring the Natural Rate of Interest: International Trends and Determinants | 1.000 | 151 | 5 | 100% |
| 2 | Stock, James H. and Mark W. Watson (1998) Median Unbiased Estimation of Coefficient Variance in a Time-Varying Parameter Model | 1.000 | 74 | 5 | 100% |
| 3 | Nyblom, Jukka (1989) Testing for the Constancy of Parameters Over Time | 1.000 | 12 | 3 | 100% |
| 4 | ––––––– (1989) Forecasting, Structural Time Series Models and the Kalman Filter | 1.000 | 6 | 3 | 100% |
| 5 | Laubach, Thomas and John C. Williams (2003) Measuring the Natural Rate of Interest | 0.843 | 3 | 3 | 100% |
| 6 | Andrews, Donald W. K. and Werner Ploberger (1994) Optimal Tests when a Nuisance Parameter is Present Only Under the Alternative | 0.737 | 3 | 2 | 100% |
| 7 | Chow, Gregory C (1960) Tests of Equality between Sets of Coefficients in Two Linear Regressions | 0.737 | 3 | 2 | 100% |
| 8 | Hamilton, James D (1994) Time Series Analysis | 0.737 | 3 | 2 | 100% |
| 9 | Shephard, Neil G. and Andrew C. Harvey (1990) On the probability of estimating a deterministic component in the local level model | 0.737 | 3 | 2 | 100% |
| 10 | Hodrick, Robert and Edward C. Prescott (1997) Post-war U.S | 0.644 | 2 | 2 | 100% |
Showing the top 10 of 25 scored citations.