R-star in Transition Economies: Evidence from Slovakia

Abstract

The aim of this paper is to estimate the equilibrium real interest rate in Slovakia by means of a semi-structural unobserved components model. The equilibrium real interest rate is understood here as a short-term, risk-free real interest rate consistent with output at its potential level, and inflation at its target level after the effect of all cyclical shocks have disappeared. Contribution to the literature is in two ways: i) development of a modelling framework for small, open, and converging economies which can be used for other transition economies, and (ii) assessment of the adoption of the euro and its effect on the equilibrium real interest rate. Based on the estimates, the equilibrium real interest rate fell from the positive pre-euro (also pre-crisis) level into to the negative territory.