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The Mirage of Falling R-stars

Author

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  • Mr. Ales Bulir
  • Mr. Jan Vlcek

Abstract

Was the recent decline in real interest rates driven by a diminishing natural real interest rate, or have we observed a long sequence of shocks that have pushed market rates below the equilibrium level? In this paper we show on a sample of 12 open economies that once we account for equilibrium real exchange rate appreciation/depreciation, the natural real interest rate in the 2000s and 2010s is no longer found to be declining to near or below zero. The explicit inclusion of equilibrium real exchange rate appreciation in the identification of the natural rate is the main deviation from the Laubach-Williams approach. On top of that, we use a full-blown semi-structural model with a monetary policy rule and expectations. Bayesian estimation is used to obtain parameter values for individual countries.

Suggested Citation

  • Mr. Ales Bulir & Mr. Jan Vlcek, 2024. "The Mirage of Falling R-stars," IMF Working Papers 2024/161, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/161
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    Keywords

    r-star; zero lower bound; equilibrium real appreciation; Penn effect; HLW framework; open-economy extension; ales Bulfr; Time-Invariant Estimates; HLW estimate; Real interest rates; Real exchange rates; Central bank policy rate; Exchange rates; Exchange rate adjustments; Global;
    All these keywords.

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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