Natural Interest Rate for the Romanian Economy

Marius Acatrinei (), Dan Armeanu () and Carmen Dobrota
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Marius Acatrinei: Financial Supervisory Authority, Senior Economist

Journal for Economic Forecasting, 2018, issue 3, 104-116

Abstract: We used a small state space model for obtaining estimates of the potential output, growth rate of the potential output and the natural interest rate. Our paper follows Laubach and Williams (2003) seminal research on natural interest rate. Since the low interest rate environment has become a reality, are we stuck in a secular stagnation world or is just a phase of the financial cycle? We have estimated the dynamics of the Natural Interest rate (NIR) for the Romanian economy between 2004 and 2016. We have found out that the official monetary policy rate was mostly close to the natural rate of interest. The results show that until 2010 the NIR was lower than the monetary policy rate explaining why the output grew faster than its potential value. When the real interest rate is below its equilibrium value, there are upward pressures on inflation. We have estimated the equilibrium interest rate at 3.8%, with two percentages higher than the official monetary policy rate (1.75%). Our estimate of the equilibrium interest rate after 2010 was higher than the official policy rate. In this way, some inflationary pressures may be explained. The results may also suggest that the Central Bank should have raised faster the interest rate. In addition to the inflationary pressure, we also showed that the steady decline of the NIR after the financial crisis of 2009 coincided with an increase in the trend growth of the potential output. Since NIR is unobservable, the uncertainty around the natural rate is large and our results confirm similar findings from the economic literature.

Keywords: natural rate of interest; Kalman filter; state space model; unobserved components (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:rjr:romjef:v::y:2018:i:3:p:104-116

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