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Estimated Natural Rate of Interest in an Open Economy: The Case of Israel

Author

Listed:
  • David Elkayam

    (Bank of Israel)

  • Guy Segal

    (Bank of Israel)

Abstract

The new Keynesian framework as presented in Clarida et al. (2002) suggests that in an open economy, the natural rate of interest consists of a local component (the expected growth of domestic total factor productivity) and a global component (the expected growth of world output). We estimate an augmented Taylor-type rule for Israel and confirm that the above-mentioned components contain valuable information about the monetary interest rate. In particular, a large part of the decline in the monetary interest rate in 2008-2009 is explained by the exceptional decline in world growth. With regard to the other and more traditional components of the rule, we find a high and significant response of the monetary interest rate to the inflation gap, the output gap, and the real exchange rate gap.

Suggested Citation

  • David Elkayam & Guy Segal, 2018. "Estimated Natural Rate of Interest in an Open Economy: The Case of Israel," Bank of Israel Working Papers 2018.05, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2018.05
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    References listed on IDEAS

    as
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    Cited by:

    1. Ilek, Alex, 2021. "Are monetary surprises effective? The view of professional forecasters in Israel," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 516-530.
    2. Alex Ilek & Guy Segal, 2022. "A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies," Bank of Israel Working Papers 2022.06, Bank of Israel.

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    More about this item

    JEL classification:

    • 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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