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Estimating Natural Rate of Interest. The Case for Azerbaijan

Author

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  • Nazrin Ramazanova

    (Central Bank of Azerbaijan Republic)

Abstract

The natural rate of interest is widely used by central banks as a policy benchmark to determine the stance of the monetary policy. This study defines the natural rate of interest as the real short-term interest rate consistent with output at its potential and stable inflation. To estimate the natural rate of interest in Azerbaijan, the methodology by Laubach and Williams (2003) has been implemented. Kalman filter is applied to jointly estimate the natural rate of interest, potential output, and its trend growth rate, and examine the empirical relationship between estimated unobserved series for the period 2004:1 to 2023:2. The findings indicate that the natural rate of interest in Azerbaijan has averaged approximately 3.1 percent. The empirical results also reveal a slight decrease in the natural rate of interest over the sample period, mostly due to the slowdown in potential GDP growth.

Suggested Citation

  • Nazrin Ramazanova, 2023. "Estimating Natural Rate of Interest. The Case for Azerbaijan," Working Papers 2302, Central Bank of Azerbaijan Republic.
    • Handle: RePEc:aze:wpaper:2302
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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