(Un)naturally Low?Likelihood inference for a DSGE model

Have interest rates been held ''too low'' in relation to the natural rate of interest over recent years? Using a dynamic optimizing business cycle model satisfying the natural rate hypothesis and generalized to allow for nonstationarity in the underlying stochastic processes, this paper attempts a real-time evaluation of the US monetary policy stance, while ensuring consistency between the specification of price adjustments and the evolution of the economy under flexible prices. To do this, the model’s likelihood function is evaluated using a Sequential Monte Carlo algorithm, providing joint estimates of the structural parameters and the unobservable, time-varying, nonstationary state variables. As a result, a detailed tracking of the whole distribution of the natural rate can be obtained, enabling a thorough assessment of half century of US monetary policy.