# No statistical significance of the TFP growth

I'm conducting an econometric analysis of the natural rate of interest in the euro-area countries using the following variables: as dependent variable I'm using the long term nominal interest rates (i.e.: the yield on 10 year maturity public bonds) and as independent variable I'm using the TFP growth rate, the inflation rate, a dummy variable to show the impact of the common monetary policy and the growth rate of the population aged between 15 and 64 years; so my equation is given by:

$$r^*= a_0 + \beta_1x_1+\beta_2x_2+\beta_3Dx_3+\beta_4x_4$$

Now, I have some problems: first of all the TFP growth does not seems to be statistically significant (since its p-value is greater than the significance level $$\alpha=0.05$$); and that's a problem, because based on the literature about this topic, what I expected to see is that higher TFP growth and higher active population growth were associated with a higher natural rate of interest. So, my question is: why this doesn't seem to happen in my model? And if I'm correct in assuming no statistical significance of the TFP growth, what I have to do to show the impact of productivity in the natural rate of interest? Thanks in advance for the answers.

• Hi @Giord. Could you attach a link to some of the papers which exhibit a statistically significant relationship? There could be many issues with your specification, ranging from functional form, to controlling for problems with your error term, alongside the specific model you've chosen. Is this a panel model? Oct 29, 2021 at 19:27
• @EB3112, One of these paper is this: nber.org/system/files/working_papers/w25039/w25039.pdf , in which (as reported here:lb.lt/en/publications/…) the authors argue that the natural interest rate has been driven down over the past three decades mainly by productivity. And no, my model is cross sectional Oct 29, 2021 at 19:34
• I feel you're trying to mimic the 'building block' eq.14 in the Negro paper if I am not mistaken? It has a time subscript. They're estimating a time series model (in fact, they've estimated many in their paper). But, a cross-sectional OLS will average over all euroarea countries and hide many important dynamics. Oct 29, 2021 at 19:45
• @EB3112, Yeah, mee to I'm trying to run a time series estimate for each of the euro area countries. What I'm trying to do is to estimate an equation similar to the one in the Lithuanian National Bank's paper. In fact my problem is to understand why productivity is not statistically significant as seems to be in the abovementioned paper Oct 29, 2021 at 19:56
• @EB3112, i.e.: the equation number two in the second paper I quoted (that is, this: lb.lt/en/publications/…) Oct 29, 2021 at 19:58