Estimating Natural Rate of Interest. The Case for Azerbaijan

Nazrin Ramazanova

No 2302, Working Papers from Central Bank of Azerbaijan Republic

Abstract: The natural rate of interest is widely used by central banks as a policy benchmark to determine the stance of the monetary policy. This study defines the natural rate of interest as the real short-term interest rate consistent with output at its potential and stable inflation. To estimate the natural rate of interest in Azerbaijan, the methodology by Laubach and Williams (2003) has been implemented. Kalman filter is applied to jointly estimate the natural rate of interest, potential output, and its trend growth rate, and examine the empirical relationship between estimated unobserved series for the period 2004:1 to 2023:2. The findings indicate that the natural rate of interest in Azerbaijan has averaged approximately 3.1 percent. The empirical results also reveal a slight decrease in the natural rate of interest over the sample period, mostly due to the slowdown in potential GDP growth.

Keywords: natural rate of interest; potential output; output gap; monetary policy (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 O40 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2023-02-14
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Persistent link: https://EconPapers.repec.org/RePEc:aze:wpaper:2302

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