Estimating the Neutral Real Interest Rate (NRIR) and Analyzing Factors of its Fluctuation in Korea (in Korean)

Minsu Kim () and Yang Su Park ()
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Minsu Kim: Price Statistics Team, Economic Statistics Department, The Bank of Korea
Yang Su Park: Macroeconomic Modelling Division, Research Department, The Bank of Korea

Economic Analysis (Quarterly), 2013, vol. 19, issue 4, 47-86

Abstract: Since central bank changed its policy instrument from the quantity of money to interest rate, the neutral real interest rate (NRIR) has been used as an important benchmark for assessing monetary policy stance. In this paper, we estimate the NRIR in Korea with the semi-structural model proposed by Laubach & Williams (2003), but extend the original model into a small open economy version which uses modified interest parity condition and reflects global investors behavior. Model evaluation indicates that the NRIR in Korea can be identified by the model to consider the economic characteristics of realistic small open economy such as imperfect capital mobility, home bias, etc., rather than by the model to assume purely closed or perfectly-open economy. We also find that the NRIR in Korea has fallen since the Asian crisis because of a decline in the potential growth rate (domestic factor) and the long-standing current account surplus (country-specific factor) which forms expectations of domestic currency appreciation and lowers country risk premium. In addition, the NRIR in Korea has possibly fallen further after the global financial crisis because weakened economic growth potential of developed countries affect that of South Korea (global factor).

Keywords: neutral real interest rate (NRIR); small open economy; modified interest rate parity (search for similar items in EconPapers)
JEL-codes: C32 E43 F41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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