The three specific models we use allow for varying emphasis on different drivers of inflation – for example, domestic versus global factors. Approach 3: A flexible statistical model is used to forecast the future value of the policy rate once all cyclical influences have dissipated, which is then used as an estimate of the neutral rate.
The idea is that this forecast is the trend value to which the policy rate will converge based on structural influences. ﻿[ 5] In practice, this method makes fewer assumptions about economic structure than the second approach. However, its estimates will only be plausible if a forecast of the future actual policy rate is actually a good estimate of the neutral rate.