The Mirage of Falling R-stars

Ales Bulir and Jan Vlcek

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: 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.

Keywords: Equilibrium real appreciation; natural rate of interest (r-star); Penn effect; zero lower bound (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-mon
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https://www.cnb.cz/export/sites/cnb/en/economic-re ... wp/cnbwp_2024_06.pdf

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Working Paper: The Mirage of Falling R-stars (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2024/6

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