Reaching for the rstars estimating South Africas neutral real interest rate

Lauren Kuhn, Franz Ruch and Max Steinbach

No 9097, Working Papers from South African Reserve Bank

Abstract: The global financial crisis (GFC) saw real interest rates fall to all-time lows as central banks aimed to stimulate economic activity. The effectiveness of such low real rates depends, to a large extent, on the neutral real interest rate popularly referred to as r-star. Monetary policy is considered expansionary when real interest rates are below r-star, and vice versa. However, the challenge arises from the fact that r-star is unobservable. This paper estimates r-star in the spirit of the popular Laubach-Williams (LW) methodology, but adapts their approach to capture the dynamics of a small open economy. This is achieved by incorporating additional drivers of the neutral rate, such as domestic net savings and investment, South Africas country risk premium, and the potential growth rate of our trading partners. In addition, foreign linkages like the exchange rate and international commodity prices are included to capture the impact of developments in the rest of the world on South African growth and inflation. The results suggest that South Africas r-star has fallen less than in advanced economies from an average of 4.4 per cent from 2000 to 2006 to 1.9 per cent in 2017Q4.

Date: 2019-02-19
New Economics Papers: this item is included in nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.resbank.co.za/content/dam/sarb/publica ... 019/9097/WP-1901.pdf Revision (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rbz:wpaper:9097

Access Statistics for this paper

More papers in Working Papers from South African Reserve Bank Contact information at EDIRC.
Bibliographic data for series maintained by Jessica VanWyk ().