What happened to R-star? : Estimating the natural rate of interest in Sweden in unconventional times

Sammanfattning: This study estimates the natural rate of interest in Sweden using two different models. One state-space model introduced by Holston et al. (2017b) and one vector autoregression model with time-varying parameters (TVP-VAR). The TVP-VAR model is then used to produce a forecast of the real interest rate 5 years out, for every point in time. This is the estimate of the neutral rate, which follows the procedure employed by Brubakk et al. (2018). The estimations from both models indicated that the natural rate of interest has risen in the last year. However, due to volatile data and methodological weaknesses discussed by Buncic (2021); Holston et al. (2020) and Brubakk et al. (2018), the estimations should be interpreted carefully. Lastly, the results indicate that the TVP-VAR model yields less volatile estimates during the COVID pandemic.