Research

U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there into 2016. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of co-movement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

The COVID-19 pandemic, like other large shocks, increased uncertainty around estimates of potential output. I examine whether this increase in uncertainty is higher relative to past crises and measure the effect of uncertainty about economic capacity on uncertainty about the appropriate path of monetary policy. I first consider models that infer the level of economic slack from data on inflation, interest rates, employment and other measures of economic activity and examine the sensitivity of estimated potential output to model specification. I find that estimates of economic slack are highly sensitive to model specification following the COVID-19 crisis. I then consider the sensitivity of estimates from production function approaches during times of crisis and examine periods of substantial divergence between the two approaches. I use the Federal Reserve’s workhorse macroeconomic model, FRB/US, to assess how uncertainty in estimates of potential output affects monetary policy prescriptions.

Banking crises can have long-lasting effects on economic growth and employment. However, uncertainty around the classification of banking crises poses challenges for quantifying their consequences. Using a new dataset with 558 candidate episodes of financial distress in 148 low-to-high income countries, spanning from 1793 through 2022, we document significant uncertainty about the timing and frequency of banking crises throughout history. We first analyze thirteen cross-country datasets of banking crises from previous studies. In over two-thirds of these episodes, leading studies disagree about the start year or end year of the crisis. In more than ten percent of these episodes, major studies disagree about whether a banking crisis occurred at all. We identify 96 additional episodes of financial distress that, to our knowledge, have not been previously included in cross-country studies. We consider the impact of this classification uncertainty on estimates of the effects of banking crises on economic activity and examine how reliance on specific criteria—bank failures, government interventions, asset price declines, and collapses in real credit growth—affects measures of crisis severity. We construct a narrative account of each episode to understand the timing of pain that banking crises inflict on economies.