Estimated Natural Rate of Interest in an Open Economy: The Case of Israel

The new Keynesian framework as presented in Clarida et al. (2002) suggests that in an open economy, the natural rate of interest consists of a local component (the expected growth of domestic total factor productivity) and a global component (the expected growth of world output). We estimate an augm...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Elkayam, David, Segal, Guy
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2018
Subjects
Economic models
Inflation
Interest rates
Israel
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Summary:The new Keynesian framework as presented in Clarida et al. (2002) suggests that in an open economy, the natural rate of interest consists of a local component (the expected growth of domestic total factor productivity) and a global component (the expected growth of world output). We estimate an augmented Taylor-type rule for Israel and confirm that the above-mentioned components contain valuable information about the monetary interest rate. In particular, a large part of the decline in the monetary interest rate in 2008-2009 is explained by the exceptional decline in world growth. With regard to the other and more traditional components of the rule, we find a high and significant response of the monetary interest rate to the inflation gap, the output gap, and the real exchange rate gap.