Scandinavian Working Papers in Economics

Working Papers,
Örebro University, School of Business

No 2023:8: The Evolution of the Natural Rate of Interest – Evidence from the Scandinavian Countries

Hanna Armelius (), Martin Solberger (), Erik Spånberg () and Pär Österholm ()
Additional contact information
Hanna Armelius: Confederation of Swedish Enterprise, Postal: Confederation of Swedish Enterprise, 114 82 Stockholm, Sweden
Martin Solberger: Department of Statistics, Uppsala University, Postal: Department of Statistics, Uppsala University, 751 20 Uppsala, Sweden
Erik Spånberg: Department of Statistics, Stockholm University, Postal: Department of Statistics, Stockholm University, 106 91 Stockholm, Sweden
Pär Österholm: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden

Abstract: In this paper, the natural rate of interest in Denmark, Norway and Sweden are estimated. This is done by augmenting the Laubach and Williams (2003) framework with a dynamic factor model linked to eco-nomic indicators – a modelling choice which allows us to better identify business cycle fluctuations. We estimate the model using Bayesian methods on data ranging from 1990Q1 to 2022Q4. The results indi-cate that the natural rate has declined substantially and in all countries is at a low level at the end of the sample.

Keywords: Monetary policy; Business cycle; Bayesian filter; Dynamic factor model

JEL-codes: E31; E43; E52

Language: English

28 pages, April 28, 2023

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