Template-Type: ReDIF-Paper 1.0
Author-Name: Pierre L Siklos
Author-X-Name-First: Pierre L
Author-X-Name-Last: Siklos
Author-Name: Dora Xia
Author-X-Name-First: Dora
Author-X-Name-Last: Xia
Author-Name: Hongyi Chen
Author-X-Name-First: Hongyi
Author-X-Name-Last: Chen
Title: R* in East Asia: business, financial cycles, and spillovers
Abstract: This paper provides new estimates of the neutral interest rate, or r*, with a frequency domain approach using quarterly data from China, Japan, Korea, and the US. Utilizing band spectrum regressions, we estimate two types of neutral rates, which hold over the business cycle and the financial cycle respectively. To account for uncertainty around estimates of r*, we derive confidence bands via a thick modelling approach. Our estimates share a few common features with existing published estimates. Consistent with prior research, a downward trend in r* is observed, although the trend becomes less obvious when uncertainty bands are factored in. Meanwhile, our findings offer novel perspectives on the neutral rate in the four countries examined. For individual countries, our estimates for the two types of r* do not always track each other, suggesting that central banks face trade-off between business versus financial cycle considerations when setting the policy rate. Across countries, we identify significant positive spillovers from the US to the three East Asia countries, as well as spillovers from China to Kora and Japan.
Creation-Date: 2025-08
File-URL: https://www.bis.org/publ/work1285.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1285.htm
File-Format: text/html
Number: 1285
Keywords: China, Japan, Korea, neutral real rate, time series and frequency domain modeling, band spectrum regression, financial cycle
Classification-JEL: E58, E32, E42, E43, C54
Handle: RePEc:bis:biswps:1285