Global Comovement, Domestic Heterogeneity, and the Natural Rate of Interest: Evidence from the G20

Abstract How much of the variation in the natural rate of interest is attributable to global, regional, and domestic forces, and do these influences differ across advanced and emerging economies? This paper addresses this question using a Bayesian state-space model estimated for the 19 national members of the G20 over 2000Q1-2025Q4. The framework jointly estimates potential output, output gaps, ex ante real-rate gaps, and natural rates from real GDP, inflation, and policy-rate data. Natural rates are decomposed into global, regional, and domestic trend-growth and preference components within a unified system of country-specific IS curves and Phillips curves. The model accommodates cross-country heterogeneity through exchange-rate depreciation, global commodity-price inflation, an unbalanced-panel likelihood, and a pandemic-specific inflation-volatility state. The results reveal substantial international comovement in natural rates. While global and regional factors contribute to common movements in equilibrium real rates, domestic factors account for the largest share of historical variation in every G20 economy. Posterior-median domestic variance shares range from 0.299 to 0.723, compared with global shares of approximately 0.06 to 0.18. Natural rates are generally higher in several emerging economies than in advanced economies, consistent with differences in growth prospects and structural conditions. These findings suggest that global forces influence the broad direction of natural-rate movements, whereas domestic fundamentals remain the primary source of persistent cross-country heterogeneity. Overall, the evidence points to a common global trend in equilibrium real rates operating alongside substantial national variation, implying that country-specific considerations remain central to the assessment of monetary-policy stance. JEL classifications: C32; E43; E52; F44