The Mirage of Falling R-stars

IMF Working Papers, July 26, 2024

Source details

Research question: Was the recent decline in real interest rates driven by a diminishing natural real interest rate, or by a long sequence of shocks that have pushed market rates below the equilibrium level?
Main finding: On a sample of 12 open economies, once equilibrium real exchange rate appreciation/depreciation is accounted for, the natural real interest rate in the 2000s and 2010s is no longer found to be declining to near or below zero.
Key deviation from prior work: 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.

Model features:
- A full-blown semi-structural model with a monetary policy rule and expectations.
- Explicit identification of equilibrium real exchange rate appreciation/depreciation.
Estimation approach:
- Bayesian estimation is used to obtain parameter values for individual countries.
Sample:
- 12 open economies.

Subject: Central bank policy rate, Exchange rate adjustments, Exchange rates, Financial services, Foreign exchange, Real exchange rates, Real interest rates
Keywords: ales Bulfr, Central bank policy rate, equilibrium real appreciation, Exchange rate adjustments, Exchange rates, Global, HLW estimate, HLW framework, open-economy extension, Penn effect, r-star, Real exchange rates, Real interest rates, Time-Invariant Estimates, zero lower bound