Neutral Interest Rates in CEEMEA — Moving in Tandem with Global Factors

Clemens Grafe, Goldman Sachs Global Investment Research
Sara Grut, Goldman Sachs Global Investment Research
Lorenzo Rigon, Stanford University

Citation: Grafe, C., Grut, S., Rigon, L. (2018). Neutral Interest Rates in CEEMEA — Moving in Tandem with Global Factors. Russian Journal of Money and Finance, 77(1), pp. 6-25.

Abstract

The decline in long term interest rates in the first decade of this millennium and a slow response of output to very lower interest rates post the global financial crisis in developed countries has sparked renewed interest into estimates and drivers of the so called neutral rate. In this article we contribute to this discussion by applying an open economy version of the Kalman filtering approach pioneered by Laubach and Williams to a number of emerging economies of the European time zone. We find that the decline in neutral interest rate in most of the countries we analyse mirrors that elsewhere, but that unlike in more developed countries very little of that decline can be attributed to declines in potential growth rates. Instead we find that estimates of US neutral rates can explain the overwhelming part of the dynamics in neutral rates in the region and we provide estimates of the elasticities to US rates. The exception is Russia where we cannot attribute any significant part of the dynamics in neutral rates to either Russia’s trend growth or the US neutral rate. Instead, we conjecture that in the last two decades neutral rates have been mostly driven by persistent terms of trade shocks.

Keywords: neutral rate, US neutral rate, Russian neutral rate, terms of trade, terms of trade shocks, potential output growth, zero lower bounds
JEL: С5, Е43, Е52

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