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Quantifying the Natural Rate of Interest in a Small Open Economy - The Czech Case

Tibor Hledik and Jan Vlcek ()

Working Papers from Czech National Bank

Abstract: We identify the natural rate of interest in the Czech Republic as the real rate consistent with output at its equilibrium level and inflation at the target. To identify the rate, we use a (semi-)structural model featuring rational expectations and a forward-looking interest rate rule. Compared to the mainstream literature, the model provides a comprehensive set of cross-restrictions with respect to unobserved variables, including that of the natural rate. Furthermore, we argue that the natural rate of interest in a small open economy is a function of equilibrium real growth adjusted for equilibrium real exchange rate appreciation. Our findings suggest that the natural interest rate in the Czech Republic was around 1 percent in 2017. The current decline of the natural rate from its peak in 2015 mainly reflects the renewed appreciation of the equilibrium real exchange rate on the back of robust real GDP growth.

Keywords: Natural rate of interest; (semi-)structural model (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-opm and nep-tra
Date: 2018-07
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2018/7

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