Testing for time variation in the natural rate of interest

Summary This paper replicates in a wider sense the unobserved components model of Laubach and Williams ( Review of Economics and Statistics , 2003, 85 , 1063–1070) to estimate the natural rate of interest (NRI) and investigates the role of model uncertainty. A stochastic Bayesian model selection procedure is employed to test the hypothesis of time variation in the NRI against a constant NRI. The model selection confirms time variation in the NRI as a result of changes in potential output growth, but other determinants of the NRI are found constant.