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A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies

Author

Listed:
  • Alex Ilek

    (Bank of Israel)

  • Guy Segal

    (Bank of Israel)

Abstract

We propose a simple methodology to estimate the short-term natural rate of interest (NRI) in small open economies. Following Clarida et al. (2002), the NRI depends on the expected growth of (1) domestic potential output and (2) output abroad. We use observable expectations within an estimated central bank's policy rules in Israel, Sweden, and Canada to derive NRI estimates. Our estimates possess strong common dynamics: they fall during crises and rise during booms. Our estimates also imply that monetary policy has been accommodative since the global financial crisis.

Suggested Citation

  • 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.
    • Handle: RePEc:boi:wpaper:2022.06
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    References listed on IDEAS

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    Cited by:

    1. Alex Ilek & Nimrod Cohen, 2023. "Semi-Structural Model with Household Debt for Israel," Bank of Israel Working Papers 2023.03, Bank of Israel.

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