A Neutral Real Interest Rate in the Case of a Small Open Economy: Application to Ukraine

Anton Grui (), Volodymyr Lepushynskyi () and Sergiy Nikolaychuk ()
Additional contact information
Anton Grui: National Bank of Ukraine
Volodymyr Lepushynskyi: National Bank of Ukraine

Visnyk of the National Bank of Ukraine, 2018, issue 243, 4-20

Abstract: This paper measures a neutral interest rate in Ukraine by means of applying a Kalman filter to a semistructural model with unobserved components. We rely on a medium-term concept of a neutral interest rate, where it is defined as a real interest rate consistent with output at its potential level and inflation at its target level after the effects of all cyclical shocks have disappeared. Under this concept, and accounting for the small open nature of Ukrainian economy, the neutral interest rate is determined by the global economy’s cost of capital and domestic long-term factors that influence risk-premium and changes in the real exchange rate. Conditional on long-term forecasts for output, demographic trends, real exchange rate changes and risk premium, the neutral rate is projected to decrease gradually from its 2.5% level as of the beginning of 2018 to 2% in real terms, or to 7% in nominal terms under a 5% inflation target. However, in the following years the gap between the National Bank of Ukraine’s policy rate and the neutral rate should remain positive – reflecting the tight monetary stance needed to ensure stable disinflation.

Keywords: Neutral interest rate; Kalman filter; monetary policy stance (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://journal.bank.gov.ua/en/article/2018/243/01 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ukb:journl:y:2018:i:243:p:4-20

DOI: 10.26531/vnbu2018.243.004

Access Statistics for this article

More articles in Visnyk of the National Bank of Ukraine from National Bank of Ukraine Contact information at EDIRC.
Bibliographic data for series maintained by Research Unit ().