This paper by Thomas Laubach and John C. Williams from the Board of Governors of the Federal Reserve System explores the natural rate of interest, a key variable for monetary policy. The authors apply the Kalman filter to jointly estimate the natural rate of interest, potential output, and its trend growth rate, examining their empirical relationship. They find significant variation in the natural rate of interest over the past four decades in the United States, with the natural rate varying one-for-one with changes in the trend growth rate. The study highlights that policymakers' mismeasurement of the natural rate can lead to significant deterioration in macroeconomic stabilization. The paper also discusses the robustness of these results to different specifications and the impact of time-varying natural rates on monetary policy. The findings suggest that recognizing the time-varying nature of the natural rate is crucial for effective policy design and implementation.This paper by Thomas Laubach and John C. Williams from the Board of Governors of the Federal Reserve System explores the natural rate of interest, a key variable for monetary policy. The authors apply the Kalman filter to jointly estimate the natural rate of interest, potential output, and its trend growth rate, examining their empirical relationship. They find significant variation in the natural rate of interest over the past four decades in the United States, with the natural rate varying one-for-one with changes in the trend growth rate. The study highlights that policymakers' mismeasurement of the natural rate can lead to significant deterioration in macroeconomic stabilization. The paper also discusses the robustness of these results to different specifications and the impact of time-varying natural rates on monetary policy. The findings suggest that recognizing the time-varying nature of the natural rate is crucial for effective policy design and implementation.