Problems of estimating the neutral interest rate: conclusions for Ukraine

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Estimation of the actual and projected level of the neutral interest rate is a central issue in the application of modern monetary theory in the practical context of monetary policy. Views on the role and key drivers of neutral interest rates have evolved over time in parallel with the development of the theory of capital, money, credit and economic growth. Therefore, the paper is aimed at generalizing methods for assessing the neutral interest rate for open economies with emerging markets and formulating recommendations for improving the existing methodological tools for estimating the neutral rate in Ukraine. To achieve this goal, theoretical sources, advisory and research materials of international organizations, central banks and statistical databases were analyzed. It is established that the key issue of the current discussion about the tools for estimating the level of neutral interest rates in countries with small open economies is the relationship between the effects of external and internal factors. The paper identifies the advantages and disadvantages of the method for estimating the level of the neutral rate on the basis of uncovered interest parity rule used by the National Bank of Ukraine within the semi-structural macroeconomic model. The expediency of methodological tools introducing into the practice of monetary regulation of Ukraine for estimating the neutral rate of Ukraine based on the Laubach-Williams approach has been proved with adaptation to the conditions of an open economy, which will consider сinternal factors of economic development – changes in potential GDP and savings.

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    • Figure 1. Neutral interest rate and domestic demand in Ukraine
    • Figure 2. Change in the neutral interest rate and its factors in Ukraine (first quarter of 2021 compared to 2019)
    • Figure 3. NBU key policy rate and interest rates on deposits, % per annum
    • Table 1. Matrix of the type of monetary policy
    • Table 2. Some factors of changes in the neutral interest rate and the type of their influence
    • Conceptualization
      Bohdan Danylyshyn
    • Data curation
      Bohdan Danylyshyn, Ivan Bohdan
    • Formal Analysis
      Bohdan Danylyshyn, Ivan Bohdan
    • Funding acquisition
      Bohdan Danylyshyn
    • Investigation
      Bohdan Danylyshyn, Ivan Bohdan
    • Methodology
      Bohdan Danylyshyn, Ivan Bohdan
    • Project administration
      Bohdan Danylyshyn
    • Supervision
      Bohdan Danylyshyn, Ivan Bohdan
    • Validation
      Bohdan Danylyshyn
    • Writing – original draft
      Bohdan Danylyshyn, Ivan Bohdan
    • Writing – review & editing
      Bohdan Danylyshyn
    • Resources
      Ivan Bohdan
    • Software
      Ivan Bohdan
    • Visualization
      Ivan Bohdan