Economics and Business
Quarterly Reviews
ISSN 2775-9237 (Online)
Published: 25 December 2023
Simple Estimations of the Natural Rate of Interest in Japan with the Band-Pass Filters
Kazuhiko Nakahira
Meikai University, Japan
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10.31014/aior.1992.06.04.552
Pages: 266-276
Keywords: Natural Rate of Interest, Inflation Expectations, Christiano-Fitzgerald Filter, Baxter-King Filter
Abstract
Estimation of natural rate of interest is required since it is unobservable. One of the practical ways of estimating the natural interest rate is to extract the trend component from estimated short-term real interest rate. We utilize the Christiano-Fitzgerald filter and the Baxter-King filter for the extraction process. If the central bank intends to raise the policy interest rate as a policy implementation when it acknowledges an inflationary pressure (or excess demand), and if this policy action is smoothly transmitted into adjustment processes of prices in economic activities, statistically observed short-term real interest rate should behave closely around the evolutionary path of the natural interest rate. In this context, the extracted trend component from short-term real interest rate by means of a statistical filter would be regarded as the estimated natural rate of interest. We utilize the Christiano-Fitzgerald filter and the Baxter-King filter for our extraction process. Concerning the estimation of expected inflation rate as the factor to construct the short-term real interest rate, the Carson-Parkin method is adopted. Our empirical results show a recent persistent decline of natural rate of interest in Japan.
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