Falling r* a ‘mirage’ in open economies – IMF paper
Adding exchange rate to standard model significantly changes predictions, authors find
The long-running decline in the natural rate of interest, known as r*, disappears for many countries after accounting for the real exchange rate, new research finds.
Aleš Bulíř and Jan Vlček focus on the widely used Holston, Laubach and Williams (HLW) model, which combines trends in real interest rates and output growth in a closed economy.
In their paper, published by the International Monetary Fund (IMF) on July 26, Bulíř and Vlček argue the HLW methodology is “problematic” for small open
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