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Natural Rate of Interest in a Small Open Economy with Application to CEE Countries

Maciej Stefański

No 2023-093, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: This paper extends the Laubach-Williams (2003) framework, which is widely used to estimate the natural rate of interest, to make it more suitable for studying small open economies. The model is augmented with consumer inflation expectations, foreign output gap, the exchange rate, energy prices and a lending spread. It also uses survey data to improve the accuracy of output gap and potential growth estimates. This model is subsequently applied to CEE countries (Poland, Czechia and Hungary) and the euro area. The natural interest rate is found to be relatively volatile and pro-cyclical; it fell following the global financial crisis, but rebounded in recent years; however, while it remains lower than before the crisis, it is positive for all analysed economies. The model gives more precise and robust estimates than the standard Laubach-Williams framework, but ex-post revisions remain substantial.

Keywords: natural interest rate; small open economy; CEE; Kalman filter (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2023-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fdg, nep-ifn, nep-mac, nep-mon, nep-opm and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2023093

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