Abstract
We propose a simple methodology to estimate the short-term natural rate of interest (NRI) in small open economies. Following Clarida et al. (2002), the NRI depends on the expected growth of (1) domestic potential output and (2) output abroad. We use observable expectations within a central bank’s estimated policy rules in Israel, Sweden, and Canada to derive NRI estimates. Our estimates possess strong common dynamics: They fall during crises and rise during booms. Our estimates also imply that monetary policy has been accommodative since the global financial crisis.
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