IMF Working Papers

The Mirage of Falling R-stars

By Ales Bulir, Jan Vlcek

July 26, 2024

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Format: Chicago

Ales Bulir, and Jan Vlcek. The Mirage of Falling R-stars, (USA: International Monetary Fund, 2024) accessed November 9, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Central bank policy rate, Exchange rate adjustments, Exchange rates, Financial services, Foreign exchange, Real exchange rates, Real interest rates

Keywords: Ales Bulfr, Central bank policy rate, Equilibrium real appreciation, Exchange rate adjustments, Exchange rates, Global, HLW estimate, HLW framework, Open-economy extension, Penn effect, Real exchange rates, Real interest rates, R-star, Time-Invariant Estimates, Zero lower bound

Publication Details

  • Pages:

    44

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2024/161

  • Stock No:

    WPIEA2024161

  • ISBN:

    9798400282966

  • ISSN:

    1018-5941

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