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Estimating the Natural Interest Rate for Iceland: An Exploratory Study

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  • Ásgeir Daníelsson
  • Ólafur Sindri Helgason
  • Stefán Thórarinsson

Abstract

We estimate the natural rate of interest for Iceland using several different methods. First we explore estimates based on the marginal productivity condition for capital, continue with various estimates based on the Euler equation for optimizing households, and end with estimates using state-space models where the natural rate is an un-observable variable, including the celebrated model by Laubach and Williams. Some of these methods give unreasonable estimates while others provide estimates that should be helpful for policy makers. The state-space models give estimates of the natural rate with negative trend before and immediately after the financial crises, but recovering during last four years of fairly rapid economic growth. The paper also provides estimates of the monetary policy stance in Iceland during the last 20 years and estimates of the implicit inflation target.

Suggested Citation

  • Ásgeir Daníelsson & Ólafur Sindri Helgason & Stefán Thórarinsson, 2016. "Estimating the Natural Interest Rate for Iceland: An Exploratory Study," Economics wp74, Department of Economics, Central bank of Iceland.
    • Handle: RePEc:ice:wpaper:wp74
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    Cited by:

    1. Doojav, Gan-Ochir & Gantumur, Munkhbayar, 2020. "Measuring the natural rate of interest in a commodity exporting economy: Evidence from Mongolia," International Economics, Elsevier, vol. 161(C), pages 199-218.
    2. Mr. Fei Han, 2019. "Demographics and the Natural Rate of Interest in Japan," IMF Working Papers 2019/031, International Monetary Fund.
    3. Stefán Thórarinsson, 2020. "DYNIMO - Version III. A DSGE model of the Icelandic economy," Economics wp84, Department of Economics, Central bank of Iceland.
    4. Ásgeir Daníelsson & Lúdvik Elíasson & Magnús F. Gudmundsson & Svava J. Haraldsdóttir & Lilja S. Kro & Thórarinn G. Pétursson & Thorsteinn S. Sveinsson, 2019. "QMM A Quarterly Macroeconomic Model of the Icelandic Economy Version 4.0," Economics wp82, Department of Economics, Central bank of Iceland.
    5. Han, Fei, 2024. "The impact of demographic change on the natural rate of interest in Japan," Japan and the World Economy, Elsevier, vol. 69(C).

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