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A Neutral Real Interest Rate in the Case of a Small Open Economy: Application to Ukraine

Author

Listed:
  • Anton Grui

    (National Bank of Ukraine)

  • Volodymyr Lepushynskyi

    (National Bank of Ukraine)

  • Sergiy Nikolaychuk

    (National Bank of Ukraine)

Abstract

This paper measures a neutral interest rate in Ukraine by means of applying a Kalman filter to a semistructural model with unobserved components. We rely on a medium-term concept of a neutral interest rate, where it is defined as a real interest rate consistent with output at its potential level and inflation at its target level after the effects of all cyclical shocks have disappeared. Under this concept, and accounting for the small open nature of Ukrainian economy, the neutral interest rate is determined by the global economy’s cost of capital and domestic long-term factors that influence risk-premium and changes in the real exchange rate. Conditional on long-term forecasts for output, demographic trends, real exchange rate changes and risk premium, the neutral rate is projected to decrease gradually from its 2.5% level as of the beginning of 2018 to 2% in real terms, or to 7% in nominal terms under a 5% inflation target. However, in the following years the gap between the National Bank of Ukraine’s policy rate and the neutral rate should remain positive – reflecting the tight monetary stance needed to ensure stable disinflation.

Suggested Citation

  • Anton Grui & Volodymyr Lepushynskyi & Sergiy Nikolaychuk, 2018. "A Neutral Real Interest Rate in the Case of a Small Open Economy: Application to Ukraine," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 243, pages 4-20.
    • Handle: RePEc:ukb:journl:y:2018:i:243:p:4-20
    DOI: 10.26531/vnbu2018.243.004
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    File URL: https://journal.bank.gov.ua/en/article/2018/243/01
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    References listed on IDEAS

    as
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    Cited by:

    1. Anton Grui & Artem Vdovychenko, 2019. "Quarterly Projection Model for Ukraine," Working Papers 03/2019, National Bank of Ukraine.
    2. Anton Grui, 2020. "Uncovered interest parity with foreign exchange interventions under exchange rate peg and inflation targeting: The case of Ukraine," IHEID Working Papers 14-2020, Economics Section, The Graduate Institute of International Studies.

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    More about this item

    Keywords

    Neutral interest rate; Kalman filter; monetary policy stance;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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