The Mirage of Falling R-stars
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Summary:
Was the recent decline in real interest rates driven by a diminishing natural real interest rate, or have we observed a long sequence of shocks that have pushed market rates below the equilibrium level? In this paper we show on a sample of 12 open economies that once we account for equilibrium real exchange rate appreciation/depreciation, the natural real interest rate in the 2000s and 2010s is no longer found to be declining to near or below zero. The explicit inclusion of equilibrium real exchange rate appreciation in the identification of the natural rate is the main deviation from the Laubach-Williams approach. On top of that, we use a full-blown semi-structural model with a monetary policy rule and expectations. Bayesian estimation is used to obtain parameter values for individual countries.
Series:
Working Paper No. 2024/161
Subject:
Central bank policy rate Financial services Foreign exchange Real exchange rates Real interest rates
Frequency:
regular
English
Publication Date:
July 26, 2024
ISBN/ISSN:
9798400282966/1018-5941
Stock No:
WPIEA2024161
Format:
Paper
Pages:
44
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