A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies

Alex Ilek and Guy Segal

No 2022.06, Bank of Israel Working Papers from Bank of Israel

Abstract: We propose a simple methodology to estimate the short-term natural rate of interest (NRI) in small open economies. Following Clarida et al. (2002), the NRI depends on the expected growth of (1) domestic potential output and (2) output abroad. We use observable expectations within an estimated central bank's policy rules in Israel, Sweden, and Canada to derive NRI estimates. Our estimates possess strong common dynamics: they fall during crises and rise during booms. Our estimates also imply that monetary policy has been accommodative since the global financial crisis.

Pages: 24 pages
Date: 2022-01
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:boi:wpaper:2022.06

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