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Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic

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  • Roman Horváth

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Abstract

This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1- 2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy.

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp848.pdf
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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp848.

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Length: pages
Date of creation: 01 Oct 2006
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Handle: RePEc:wdi:papers:2006-848

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Keywords: equilibrium interest rates; Taylor rule; augmented Kalman filter;

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  1. Canova, Fabio, 1998. "Detrending and business cycle facts," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(3), pages 475-512, May.
  2. Mesonnier, Jean-Stephane & Renne, Jean-Paul, 2007. "A time-varying "natural" rate of interest for the euro area," European Economic Review, Elsevier, Elsevier, vol. 51(7), pages 1768-1784, October.
  3. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers, Michigan State - Econometrics and Economic Theory 8905, Michigan State - Econometrics and Economic Theory.
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  5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  6. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  7. David Navratil & Viktor Kotlan, 2005. "The CNB's Policy Decisions - Are They Priced in by the Markets?," Research and Policy Notes, Czech National Bank, Research Department 2005/01, Czech National Bank, Research Department.
  8. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Empirica, Springer, Springer, vol. 31(2), pages 185-204, June.
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  11. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 7(02), pages 239-262, April.
  12. Gerdesmeier, Dieter & Roffia, Barbara, 2005. "The relevance of real-time data in estimating reaction functions for the euro area," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 16(3), pages 293-307, December.
  13. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  14. Jaromir Benes & Papa M'B. P. N'Diaye, 2004. "A Multivariate Filter for Measuring Potential Output and the NAIRU Application to the Czech Republic," IMF Working Papers 04/45, International Monetary Fund.
  15. Ladislav Wintr & Paolo Guarda & Abdelaziz Rouabah, 2005. "Estimating the natural interest rate for the euro area and Luxembourg," BCL working papers, Central Bank of Luxembourg 15, Central Bank of Luxembourg.
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Cited by:
  1. Ebru Yuksel & Kývýlcým Metin Ozcan & Ozan Hatipoglu, 2012. "A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through," Working Papers, Bogazici University, Department of Economics 2012/08, Bogazici University, Department of Economics.
  2. Ansgar Belke & Jens Klose, 2009. "Does the ECB Rely on a Taylor Rule?: Comparing Ex-post with Real Time Data," Discussion Papers of DIW Berlin 917, DIW Berlin, German Institute for Economic Research.

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