 International comovement of r∗: A case study of the G7 countriesJournal of Empirical Finance, 2023, vol. 74, issue C Abstract: The natural rate of interest, r∗, is an important input to determine the appropriate monetary policy stance. Commonly, the measurement is estimated on a single-country basis, which ignores the international factors that may affect r∗. However, expanding to a multiple-country model adds substantive model complexity. In this paper, I exploit a Bayesian method to build a multi-country state space model, which is an extension of Holston et al. (2017), to jointly estimate r∗ for the G7 countries. Furthermore, in the process of estimating the model, I decompose the country level r∗ into common, regional, and idiosyncratic components and identify the dynamics of each component. I find that across the G7 countries r∗ has been declining since the 1990s and is driven by the common component. I also find the contribution of the idiosyncratic components to r∗ is minor. These results suggest a synchronization of the natural rate of interest across countries since the 1990s, supporting the idea posited in Del Negro et al. (2019) that the low natural rate is due to a rise in the demand for safe and liquid assets. Keywords: The natural rate of interest; G7; State-space model; Decomposition (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823000920 DOI: 10.1016/j.jempfin.2023.101425 Access Statistics for this article Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff More articles in Journal of Empirical Finance from Elsevier |
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