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The Neutral Interest Rate: Estimates for Chile

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  • Rodrigo Fuentes S
  • Fabián Gredig U.

Abstract

To estimate the neutral real interest rate for Chile, we use a variety of methods that can be classified into three categories: those derived from economic theory, the neutral rate implicit in financial assets, and statistical procedures using macroeconomic data. We conclude that the neutral rate is not constant over time, but it is closely related with—though not equivalent to—the potential GDP growth rate. The application of the different methods yields fairly similar results. The neutral real interest rate for Chile seems to be in the range from 2.1% to 3.5%, with a median of 2.8% taking data of the fourth quarter of 2007.

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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 11 (2008)
Issue (Month): 2 (August)
Pages: 47-58

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Handle: RePEc:chb:bcchec:v:11:y:2008:i:2:p:47-58

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  1. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  2. César Calderón M. & Francisco Gallego Y., 2002. "La Tasa de Interés Real Neutral en Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 5(2), pages 65-72.
  3. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
  4. Giammarioli, Nicola & Valla, Natacha, 2003. "The natural real rate of interest in the euro area," Working Paper Series, European Central Bank 0233, European Central Bank.
  5. Antulio N. Bomfim, 2001. "Measuring equilibrium real interest rates: what can we learn from yields on indexed bonds?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-53, Board of Governors of the Federal Reserve System (U.S.).
  6. Clark, Todd E. & Kozicki, Sharon, 2004. "Estimating equilibrium real interest rates in real-time," Discussion Paper Series 1: Economic Studies 2004,32, Deutsche Bundesbank, Research Centre.
  7. Jean-Paul Lam, 2004. "Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General-Equilibrium Framework," Working Papers, Bank of Canada 04-9, Bank of Canada.
  8. Rodrigo Fuentes & Fabián Gredig & Mauricio Larraín, 2008. "La brecha de producto en Chile: medición y evaluación," Investigación Conjunta - español, , , edition 1, volume 1, number 1-03 edited by Centro de Estudios Monetarios Latinoamericanos (CEMLA), December.
  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  10. Daniel Leigh, 2005. "Estimating the Implicit Inflation Target," IMF Working Papers 05/77, International Monetary Fund.
  11. Giammarioli, Nicola & Valla, Natacha, 2004. "The natural real interest rate and monetary policy: a review," Journal of Policy Modeling, Elsevier, Elsevier, vol. 26(5), pages 641-660, July.
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