Measuring the Natural Rate of Interest with Financial Gaps: The Cases of Japan and South Korea

Abstract We estimate “finance-adjusted” trend growth and natural rates of Japan and South Korea by extending a semi-structural model of ( Laubach and Williams, 2003 ). Consistent with international evidence of the advanced economies, both trend growth and natural rates of interest of Japan and South Korea have been declining over the past, suggesting the important role of global factors. However, the declining patterns of Japan and South Korea are far steeper during the past 25 years. When considering domestic and global financial factors, trend growth and natural rate of South Korea are more affected by foreign financial factor while the role of domestic financial factor is more pronounced for Japanese economy.