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Estimated Natural Rate of Interest in an Open Economy: The Case of Israel

David Elkayam () and Guy Segal ()

No 2018.05, Bank of Israel Working Papers from Bank of Israel

Abstract: The new Keynesian framework as presented in Clarida et al. (2002) suggests that in an open economy, the natural rate of interest consists of a local component (the expected growth of domestic total factor productivity) and a global component (the expected growth of world output). We estimate an augmented Taylor-type rule for Israel and confirm that the above-mentioned components contain valuable information about the monetary interest rate. In particular, a large part of the decline in the monetary interest rate in 2008-2009 is explained by the exceptional decline in world growth. With regard to the other and more traditional components of the rule, we find a high and significant response of the monetary interest rate to the inflation gap, the output gap, and the real exchange rate gap.

JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2018-07
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