Measuring Natural Rate of Interest in Uzbekistan

Islomjon Inkhomiddinov
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Islomjon Inkhomiddinov: The Central Bank of Uzbekistan

No 02-2025, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: The natural rate of interest, often interpreted as the equilibrium real interest rate, serves as a critical benchmark for evaluating the stance of monetary policy. This paper investigates the natural rate of interest in Uzbekistan using three econometric approaches: the HLW-type model (1), a modified HLW-type model, and the Central Bank of Uzbekistan's Quarterly Projection Model (QPM), semi-structural framework. The semi-structural HLW-type and modified HLW-type models estimate the real interest rate using core inflation, while the QPM relies on headline inflation. The results indicate that the natural rate was relatively stable across the models. The semi-structural HLW-type and modified HLW-type models produced average natural rate estimates of 4.5 percent and 4.1 percent, respectively, while the QPM estimated a slightly lower average rate of 3.4 percent. On average, the natural rate across all models was approximately 4.0 percent. In contrast, the real interest rate exhibited significant variability, reflecting periods of accommodative monetary policy before the adoption of the inflation targeting regime and restrictive policies during the IT regime’s active implementation. These findings emphasize the critical role of accurately estimating the natural rate to guide monetary policy and ensure macroeconomic stability effectively. (1) Holston-Laubach-Williams (2016)

Keywords: Natural level of Real Interest Rate; Core Inflation; Kalman Filter; Bayesian Estimation (search for similar items in EconPapers)
JEL-codes: E42 E43 E52 E59 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2025-02-03
New Economics Papers: this item is included in nep-cba, nep-mon and nep-tra
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