Measuring The Natural Rate Using Natural Experiments

Every month, a fraction of UK property leases are extended for another 90 years or more. We use new data on thousands of these natural experiments from 2003 onwards to estimate the “natural rate of return on capital”, r*KrK* , which also represents the long-run dividend-price ratio. r*KrK* stays around 4.8% between 2003 and 2006, but starts to fall at the onset of the Great Recession, reaching a low of 2.3% in 2022. Real-time monthly data shows a modest uptick in r*KrK* in 2023 thus far. The natural experiment approach to measuring r*KrK* is precise, avoids misspecification concerns and provides real-time estimates using publicly available data.