Using the Natural Rate Concept to Assess the Consistency of Projections Ten Years Ahead for Real Interest Rates and Inflation: Technical Paper 2004-05

The concept of the “natural” long-term interest rate, a rate that is determined by the underlying production capability of the economy, provides a way to check the internal onsistency of medium-term economic projections. Forecasters who use a neoclassical growth model to project the level of real Gross Domestic Product, as does the Congressional Budget Office, are implicitly projecting the natural rate, because the growth model simulates the production capability of the economy. The assumptions that are embedded in the growth model can be used to calculate the natural rate. In addition,