Estimating the Natural Rate of Interest in an Open Economy

Abstract Article deals with estimating real natural interest rate and exchange rate to construct monetary conditions index suitable for the Czech open economy. Despite unobservable characteristics of underlying interest rates and exchange rate, the importance of reference indicators for monetary policy is crucial. Proposed monetary condition index in gap form examines monetary impulse on economic and credit cycle in inflation targeting model.

Download Full-text

Concluding Remarks on the Negative Natural Rate of Interest

Saving and Investment in the Twenty-First Century ◽

10.1007/978-3-030-75031-2_8 ◽

2021 ◽

pp. 225-245

Author(s):

Carl Christian von Weizsäcker ◽

Hagen M. Krämer

Keyword(s):

Public Debt ◽

Full Employment ◽

Natural Rate ◽

Extrapolation Procedure ◽

The Public ◽

Secular Evolution ◽

Natural Rate Of Interest ◽

Great Divergence ◽

China Region ◽

Over Time

AbstractThe Great Divergence: The period of production T is not rising anymore. The “waiting period” Z is rising over time with the rising standard of living and rising life expectancy, and this is the case worldwide. In the interest of full employment, the public debt periodD has to compensate for this divergence: T = Z − D. Using an extrapolation procedure that we have developed and the available empirical data, we calculate total private wealth in the OECD plus China region. Net public debt already accounts for nearly half of private wealth today. COVID-19 increases the optimal steady-statepublic debt period. Both our theory and our empirical findings are increasingly confirmed by the work of other economists: for example, by Lawrence Summers’secular stagnation thesis and by the study of Jordà, Schularick and others on the secular evolution of private wealth.

Download Full-text

The Natural Rate of Interest and the Optimal Rate of Interest in the Steady State

Saving and Investment in the Twenty-First Century ◽

10.1007/978-3-030-75031-2_2 ◽

2021 ◽

pp. 17-41

Author(s):

Carl Christian von Weizsäcker ◽

Hagen M. Krämer

Keyword(s):

Steady State ◽

Public Debt ◽

Fundamental Equation ◽

Optimal Rate ◽

Natural Rate ◽

Real Rate ◽

Capital Theory ◽

Steady State Rate ◽

Natural Rate Of Interest ◽

State Rate

AbstractThe “natural rate of interest” is the hypothetical, risk-free real rate of interest that would obtain in a closed economy, if net public debt were zero. It is considerably less than the optimal steady-state rate of interest, which is equal to the system’s growth rate. This holds for a very general “meta-model.” The fundamental equation of capital theory holds on the optimal steady-state path: T = Z − D, where T is the overall economic period of production, Z is the representative private “waiting period” of consumers and D is the public debt ratio. Prosperity is at least 30% lower at the natural rate of interest than at the optimal rate.

Download Full-text

Identification-Robust Estimates of the Canadian Natural Rate of Interest

L Actualité économique ◽

10.7202/1036918ar ◽

2016 ◽

Vol 91 (1-2) ◽

pp. 161-176

Author(s):

Maral Kichian

Keyword(s):

Interest Rate ◽

Robust Methods ◽

Errors In Variables ◽

Natural Rate ◽

Real Rate ◽

Point Estimates ◽

Natural Rate Of Interest ◽

Best Fitting ◽

Estimate Precision ◽

Fitting Model

The natural rate of interest is an unobservable entity and its measurement presents some important empirical challenges. In this paper, we use identification-robust methods and central bank real-time staff projections to obtain estimates for the equilibrium real rate from contemporaneous and forward-looking Taylor-type interest rate rules. The methods notably account for the potential presence of endogeneity, under-identification, and errors-in-variables concerns. Our applications are conducted on Canadian data. The results reveal some important identification difficulties associated with some of our models, reinforcing the need to use identification-robust methods to estimate such policy functions. Despite these challenges, we are able to obtain fairly comparable point estimates for the real equilibrium interest rate across our different models, and in the case of the best fitting model, also remarkable estimate precision.

Download Full-text

Brazil: monetary policy and the neutral interest rate

Journal of Economic Studies ◽

10.1108/jes-10-2014-0168 ◽

2016 ◽

Vol 43 (6) ◽

pp. 966-979

Author(s):

Cleomar Gomes da Silva ◽

Rafael Cavalcanti de Araújo

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Real Interest Rate ◽

Design Methodology ◽

Macroeconomic Model ◽

Natural Rate ◽

Content Type ◽

Natural Rate Of Interest ◽

The Interest Rate ◽

Definition Of

Purpose The purpose of this paper is to analyze the conduct of monetary policy in Brazil and estimate the country’s neutral real interest rate. Design/methodology/approach The authors make use of a state-space macroeconomic model representation. Findings The period of analysis goes from 2003 up to the end of 2013 and the results show that the country’s natural rate of interest was around 4.2 percent in December 2013. Originality/value One of the main differences of this work is the inclusion of variables such as the real exchange rate and world interest rate. This is important because these variables play an important role in the definition of the interest rate and, consequently, in the definition of the neutral interest rate.

Download Full-text