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

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  • Tibor Hledik
  • Jan Vlcek

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.

Suggested Citation

  • Tibor Hledik & Jan Vlcek, 2018. "Quantifying the Natural Rate of Interest in a Small Open Economy - The Czech Case," Working Papers 2018/7, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2018/7
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2018_07.pdf
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    References listed on IDEAS

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    Cited by:

    1. Andrey Sinyakov & Alexey Porshakov, 2019. "Estimates of the Natural Rate of Interest for Russia: Is 'Navigating by the Stars' Useful?," Russian Journal of Money and Finance, Bank of Russia, vol. 78(4), pages 3-47, December.
    2. Islomjon Inkhomiddinov, 2025. "Measuring Natural Rate of Interest in Uzbekistan," IHEID Working Papers 02-2025, Economics Section, The Graduate Institute of International Studies.
    3. Robert C. M. Beyer & Lazar Milivojevic, 2023. "Dynamics and synchronization of global equilibrium interest rates," Applied Economics, Taylor & Francis Journals, vol. 55(28), pages 3195-3214, June.
    4. Hodula, Martin & Libich, Jan, 2023. "Has monetary policy fueled the rise in shadow banking?," Economic Modelling, Elsevier, vol. 123(C).
    5. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.

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    More about this item

    Keywords

    Natural rate of interest; (semi-)structural model;

    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
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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