Natural Interest Rate: Is 2% CPI Inflation Still the Right Target?
|Author:||Mgr. Lucie Scheerová|
|Year:||2017 - summer|
|Leaders:|| doc. Mgr. Tomáš Holub Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:|
|Abstract:||This paper uses the semi-structural Laubach and Williams model to estimate the timevarying
natural rate of interest by Kalman filter and Maximum Likelihood method,
applying it for the first time to Czech data. The results show a significant decrease of
the natural interest rate during the past decade, which constitutes further evidence for
the wide-spread notion that structural factors in many countries have shifted after the
global financial crisis. The paper’s contribution is mainly represented by preparing
ground for further research. It concludes that the basic version of the Laubach and
Williams model is not optimal for the Czech environment and suggests appropriate
adjustments to it. It discusses and analyzes sources of potential problems with the
estimation, notably the issues of singularity and model specification. Eventually the
paper concludes that due to the low significance of results and the uncertainty of gains
and losses related to a policy switch, the best reaction of the central bank would be
to keep the current regime and inflation target.