Natural Rate Of Interest Research Articles

FORECASTING CONSUMER PRICE INDEX USING MACROECONOMIC VARIABLES: A COMPARATIVE ANALYSIS OF MACHINE LEARNING AND DEEP LEARNING APPROACHES

The Turkish economy has faced many economic difficulties throughout it's history. At this point, predicting inflation accurately is very important for policy makers, businesses, investors and consumers. This study aims to estimate the Turkish Consumer Price Index. Producer price index, M1 money supply, gold price, dollar price, natural gas price and interest rate variables were used to estimate the CPI for Turkey. The variables used in the research were obtained through EVDS, the Central Bank's Electronic Data Management System. Monthly data from January 2003 to August 2023 was used in the study. The obtained data were estimated using DDPG, XGBoost, SVR, KNN and CNN-BiLSTM methods. Model performances were compared using RMSE, MSE, MAE, MAPE and R2 statistical coefficients. When model performances were evaluated, the best CPI prediction for Turkey was obtained by the SVR method.

The New Keynesian Phillips Curve and r* ${r}^{* }$

AbstractIn this article, I argue that shifts in the natural rate of interest provide important insights for the New Keynesian Phillips Curve (NKPC). The deviation of the real interest rate from the natural interest rate (interest rate gap) captures the monetary policy stance, which is important for the dynamics of inflation and the output gap in the wake of persistent and permanent variation in the natural rate of interest. I present the evolution of the estimates of the Taylor‐rule consistent‐ natural interest rate, and thus the associated path of the expectations of future inflation via the Fisherian relationship. The path of these two variables has implications for estimation of the NKPC.

Estimating the natural rate of interest for the emerging Asia

This paper evaluates the natural rate of interest (NRI) for Indonesia, Malaysia, Philippines, Singapore, South Korea, [Taipei, China], and Thailand and aggregates them using a GDP-weighted average. This paper discusses four key points. Firstly, to estimate the NRI in emerging Asian economies, this paper introduces a Time Varying Parameter Vector Autoregression (TVP-VAR) model that integrates exchange rates alongside conventional growth and inflation variables. Secondly, the results show that NRIs in the emerging Asia have been declining in trend since the 1990s. Thirdly, the behavior of the NRI for each economy is not uniform across crises—the Asian Financial Crisis, the Global Financial Crisis, and the COVID-19 pandemic. Fourthly, the findings reveal that the ascertained Asian NRI decreased to the vicinity of 0% during the COVID-19 pandemic period.

On natural interest rate volatility

Episodes of low natural interest rates, even transitory, pose a challenge to monetary policy, by possibly causing the effective lower bound (ELB) on the policy rate to bind. Those episodes are more likely to occur not only when the natural rate is low on average but also when fluctuations around its average level are large. We study the responsiveness of the natural interest rate to structural aggregate shocks affecting the aggregate supply of and demand for savings. Using a quantitative overlapping-generations model, we trace back this responsiveness to the slopes of aggregate savings supply and demand curves and argue that both curves have likely flattened over the past four decades in the US This implies a greater sensitivity of the natural interest rate to structural shocks affecting the supply of and demand for aggregate savings — making it more likely, all else equal, that it fall into negative territory.

Stagnation and the Natural Rate of Interest: Tracing the Roots of Lawrence Summers’s Theory of Secular Stagnation

ABSTRACT Over the past decade, Lawrence Summers has argued that stagnation cannot be rectified by monetary policy because it is the result of a negative natural rate of interest. This analysis brings together two separate streams of thought: traditions in which stagnation has been connected to excessive saving linked to income distribution, or to diminishing investment demand; and a tradition centred on the natural rate of interest and its relationship to the market rate. However, they remained largely separated until Summers brought them together. Modern discussions of the natural rate stem from Knut Wicksell’s Interest and Prices (1898). However, although he came close to arguing that the natural rate might be negative during cyclical depressions, it was mainly under-consumptionists who argued for the possibility of stagnation. These two strands of thinking came closer in the interwar period but they remained separate. The main advocate of secular stagnation, Alvin Hansen, drew on the American Institutionalist tradition, not Wicksell. Postwar Keynesians did not pursue the idea of a negative natural rate even though Samuelson had provided a theoretical explanation. It was not until Summers that a negative natural rate, income distribution and the possibility of secular stagnation were brought together.

Inflation-overshooting commitment: an analysis using a macroeconomic model

Abstract This article examines the effectiveness of the makeup strategy for Japan’s economy, where inflation expectations formation is known to be largely adaptive. We build a small-scale macroeconomic model and conduct simulation analysis to study the implications of adopting the makeup strategy for early achievement of the inflation target and the incurring costs. Simulation results show that when the inflation rate has been below the target, it is effective to stabilize average inflation by offsetting the past inflation misses over some makeup windows and that when the natural rate of interest is lower, the optimal makeup window becomes longer.

Effect of Public Finance Implications on The Economic Standard of Nigerians: A Longitudinal Study

This study examined the impact of the national budget, exchange rates, trade openness, inflation rates, and interest rates on the purchasing power parity and per capita income of Nigeria during the period spanning from 2009 to 2022. Data was gathered from the Central Bank Nigeria and the World Bank. The data was further analyzed using descriptive statistics and Ordinary Least Square methods at a significance level of 5% for the purpose of detailed estimation. Results of the study showed that the national budget, exchange rates, trade openness, inflation rates, and interest rates had significant and positive impacts on Nigeria’s purchasing power parity and per capita income. The results of the study imply that, to increase the purchasing power parity and per capita income of Nigerian citizens, the government should focus on improving the quality of budget execution, ensure exchange rate stability, implement more trade policies that will open the Nigerian market and increase foreign investment, focus on maintaining a low inflation rate, and ensure the stability of

Financial Openness and Trade (Real) Openness: Should We Open up Both Markets?

This study examines the 'interdependence' between financial openness and trade (real) openness, as well as the macroeconomic determinants of such relationship from a general equilibrium perspective (viz. the balance of payments constraint). The macroeconomics factors are national income, exchange rate, and interest rate. The data cover 124 countries over a period spanning between 1970 and 2019. The 'interdependence' between financial and trade openness is captured by a positive Pearson correlation in most of the countries (i.e. between 60% and 79% of the countries). However, a more precise measure of a bidirectional causality between both openness exists in only 35% (44 countries) of 124 countries. The empirical results show that exchange rate explains negatively the estimated correlation coefficients between financial and trade openness, as well as for low income countries. While, the interest rate increases the likelihood of their bidirectional causality results. This study provides policy insights related to both the financial and real markets.

Threshold Effect of Financial Inclusion on Poverty Reduction in Africa: Does institutional quality play a role?

ABSTRACT In Africa, poverty levels are still very high, especially with the advent of the COVID-19 pandemic, despite efforts by governments and development partners to address it. Financial inclusion has been identified as an important concept in fighting poverty due to its ability to increase the income level of households. This study sought to estimate the threshold level at which financial inclusion, aided by strong institutions, will lead to poverty reduction in Africa, using Hansen’s threshold estimation method, covering a period of 2004–2020. The Hansen threshold estimation method uses an endogenous approach to identify threshold values, which eliminates deterministic process by using a systematic approach, as compared to the linear methods of sample-splitting of threshold-level specifications by other methods. This therefore makes the Hansen threshold estimation method robust in threshold estimations compared to other methods. The study found double threshold values of 0.0534 and 0.341, indicating that a financial inclusion value below 0.0534 would increase household consumption expenditure, leading to poverty reduction. However, a threshold value between 0.0534 and 0.3141 has a negative impact on poverty reduction. Furthermore, beyond a threshold value of 0.3141, financial inclusion will improve household consumption and as such reduce poverty in Africa. The study also established a threshold value of institutional quality index of −1.6325, indicating that below that institutional quality index, financial inclusion will have a negative impact on household consumption as well as poverty reduction in Africa. The results further indicated that dependency ratio, gross national income, interest rate, inflation, education, and government expenditure contribute significantly to poverty reduction in Africa. It is recommended that development partners, central banks and governments in the region should consciously develop and implement financial literacy policies, with the collaboration of all financial institutions that are aimed at promoting financial inclusion due to its ability to end poverty.

Climate risk and the natural interest rate: An E-DSGE perspective

We examine the effect of climate-induced temporary extreme weather events on the natural real interest rate by incorporating environmental aspects into a Keynesian growth model. We find that environmental damage accentuates the reduction in the natural real interest rate caused by climate-induced temporary supply disruptions, and this effect is even more pronounced when the estimate of the current stock of carbon dioxide in the atmosphere doubles.

Dynamic Modeling of Environmental Subsidies

In this research, the intertemporal optimal management of subsidies offered by the environmental regulator and the dynamic conflict between two groups of economic agents involved in environmental quality are discussed. First the environmental model is examined in its optimal control management form with two state variables. The analysis of the improved model, inspecting the social planner’s decision (policy) variable, the variable which influences not only environmental quality but the national budget stock, reveals that is dependent on the growth of the national budget stock. A negative growth rate leads to the long run saddle point equilibrium, while an incremental growth rate, but less than the model’s discount rate, leads to an interesting complicated limit cycle equilibrium, for which under certain parameter values the orbit’s phase portrait can be drawn. For the dynamic game model between the social planner and natural resource exploiters, the equilibrium conditions are examined. It is rather a richer than the point equilibrium for which the cyclical strategies have great importance. Therefore, the conditions for that rich equilibrium are found. As a continuation, the paper concludes that the equilibrium condition is that the players’ discount rates are both greater than the national budget interest rate. Finally, the certain values of the equilibrium strategies and national budget stock are provided.

The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds

The so-called equilibrium or natural rate of interest, widely known as r*t, is a key variable used to judge the stance of monetary policy. We offer a novel euro-area estimate based on a dynamic term structure model estimated directly on the prices of bonds with cash flows indexed to the euro-area harmonized index of consumer prices with adjustments for bond-specific risk and real term premia. Despite a recent increase, our estimate indicates that the natural rate in the euro area has fallen about 2 percentage points on net since 2002 and remains negative at the end of our sample. We also devise a related measure of the stance of monetary policy, which suggests that monetary policy in the euro area was not accommodative at the height of the COVID-19 pandemic.

The Deflationary Bias of the ZLB and the FED's Strategic Response

AbstractThe paper shows, in a simple analytical framework, the existence of a deflationary bias in an economy with a low natural rate of interest, a zero lower bound (ZLB) constraint on nominal interest rates and a discretionary Central Bank (CB) with an inflation mandate. The presence of the ZLB prevents the CB from offsetting negative shocks to inflation whereas it can offset positive shocks. This asymmetry pushes average inflation below the target which in turn drags down inflation expectations and reinforces the likelihood of hitting the ZLB. We show that this deflationary bias is particularly relevant for a CB with a symmetric dual mandate (i.e., minimizing deviations from inflation and employment), especially when facing demand shocks. But a strict inflation targeter cannot escape the suboptimal deflationary equilibrium either. The deflationary bias can be mitigated by targeting “shortfalls” instead of “deviations” from maximum employment and/or using flexible average inflation targeting. However, changing monetary policy strategy risks inflation expectations becoming entrenched above the target if the natural interest rate increases.

A Post-Pandemic New Normal for Interest Rates in Emerging Bond Markets? Evidence from Chile

Before the COVID-19 pandemic, researchers intensely debated the extent of the decline in the steady-state short-term real interest rate—the so-called equilibrium or natural rate of interest. Given the recent sharp increase in interest rates, we revisit this question in an emerging bond market context and offer a Chilean perspective using a dynamic term structure finance model estimated directly on the prices of individual Chilean inflation indexed bonds with adjustments for bond-specific liquidity risk and real term premia. We estimate that the equilibrium real rate in Chile fell about 2 and a half percentage points in the 2003-2022 period and has remained low since then.

Econometric issues in the estimation of the natural rate of interest

The natural rate of interest is a key benchmark steady-state rate of return that is used by central banks to measure the stance of monetary policy. Asset managers rely on estimates of the natural rate to make long-term investment decisions for their clients. This paper outlines a number of important econometric issues in the estimation of the natural rate of interest from a widely used structural model. Using a simulation experiment as well as empirical data for the U.S., I show that one of the key parameters of the structural model is overestimated and leads to a spuriously amplified downward trend in the natural rate. The paper shows how the overestimation can be remedied and provides alternative estimates of the natural rate. Various other issues are discussed that policy makers should be aware of when utilizing this model’s natural rate estimates for policy decision.

The impact of demographic change on the natural rate of interest in Japan

This paper develops a semi-structural model to estimate the impact of demographic changes on the natural rate of interest in Japan. We find that demographic changes have a significantly negative impact on the natural rate by lowering the trend potential growth. We also find that the negative impact has increased over time amid stronger demographic headwinds. A lower natural rate of interest could challenge the Bank of Japan’s efforts to reflate the economy. These findings call for measures to boost Japan’s potential growth to offset the negative demographic impact and lift the natural rate of interest.

КЕЙНСІАНСЬКА КРИТИКА НЕЗАЛЕЖНОСТІ ЦЕНТРАЛЬНИХ БАНКІВ

The article is aimed at analyzing the arguments of Keynesianism representatives against the modern paradigm of central banks independence. According to the result of the study, the modern paradigm of independence of central banks is the result of the adoption of a framework for monetary policy in the form of inflation targeting and represents a certain set of indicators of legal and actual protection against political interference in monetary policy. The Keynesian approach to monetary policy is based on an understanding of the principles of the money market, where there is only a natural interest rate and the role of the central bank is usually offset by this. The natural interest rate is defined as the equilibrium rate of the economy with flexible prices and reflects the potential in the dichotomy of “consumption-investment”. In turn, the central bank's rate, which is usually not the same as the natural one, determines the monetary institution's policy of limiting or stimulating economic growth through control of inflation. The central bank is given the role of an auxiliary tool for ensuring economic equilibrium along with fiscal policy or a discretionary body, which adapts to short-term decisions aimed at reducing unemployment. According to Keynesianism in the long term, there is a tendency to neutrality of money and the central bank can only influence demand in the short term. From this position, the implementation of an activist independent monetary policy negatively affects the economic development due to the uneven impact of interest rates on various sectors of the economy; the inability of central banks to “fine-tune” the economy and the inefficiency of interest rates as a tool of monetary policy by incorporating it into the expectations of economic entities. Based on this, the author determined that the role of central banks, according to Keynesian tradition, varies from an auxiliary tool for ensuring economic growth (Phillips curve) to their compliance with systematic, objective rules for limited purposes (price stability and proper functioning of the financial system).

The Natural Rate of Interest: Selected Conceptual Differences among Wicksell, von Mises and Woodford and Implications for Estimation and Monetary Policy

The Natural Rate of Interest: Selected Conceptual Differences among Wicksell, von Mises and Woodford and Implications for Estimation and Monetary Policy

Drivers of the natural long-term rate of interest (and why the economy hasn’t tanked)

Abstract Long-term borrowing costs have been on a path of near continuous decline for the last several decades, with huge consequences for asset values, government finances, borrowers and savers. To shed light on why, we have estimated a global model that brings together an extensive set of drivers of the natural rate of interest for 12 advanced economies, using data spanning half a century. We find that slower growth and the age structure of the population accounted for about half of the three percentage point decline in the real natural rate for the USA between 1970 and a trough in the mid-2010s. Global spillovers account for a bit more than a third of the decline. Our model suggests the natural rate in the USA has climbed more than half a percentage point since the trough, partly reflecting extraordinary fiscal stimulus in the USA. Rather than on overnight rates, our model is estimated on 10-year borrowing costs. That is because monetary policy has increasingly relied on squeezing the whole yield curve to support demand. Importantly, when viewed through a longer-term lens, US monetary policy does not look as tight as it does when looking at short-term rates alone. This may help to explain why the economy has been so resilient to the post-pandemic hiking cycle.

Simple Estimations of the Natural Rate of Interest in Japan with the Band-Pass Filters

Simple Estimations of the Natural Rate of Interest in Japan with the Band-Pass Filters