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To Cut or Not to Cut? That is the (Central Bank’s) Question In Search of the Neutral Interest Rate in Latin America

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  • Nicolas E. Magud
  • Evridiki Tsounta
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    Abstract

    This paper estimates neutral real interest rate (NRIR) ranges for 10 Latin American countries that either have full-fledged inflation targeting regimes in place or have recently adopted them, using an array of methodologies commonly used in the literature. We find that NRIRs have declined in the last decade, with more economically and financially developed economies exhibiting lower NRIR levels. Based on the estimated NRIRs, we assess that the current monetary stance (measured by the interest rate gap) is appropriately neutral in most of the considered economies, in line with closing output gaps. We also observe that the interest rate gap can be a good predictor of future inflation dynamics and economic growth. In addition, looking at the recent experiences in Brazil and Peru, we suggest that macro-prudential policies could affect the monetary stance even in the absence of direct interest rate changes, through affecting the NRIR.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/243.

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    Length: 48
    Date of creation: 09 Oct 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/243

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    Keywords: Central banks; Latin America; Interest rates; Interest rate policy; Monetary policy; Inflation targeting; Economic models; Cross country analysis; neutral interest rate; monetary stance; macrorpudential policies; real interest rate; reserve requirements; monetary fund; foreign currency; foreign exchange; inflation rates; monetary transmission mechanisms; nominal interest rate; real interest rates; rate of inflation; monetary policy frameworks; minimum reserve requirements; aggregate demand; international liquidity; legal reserve requirements; high interest rates; financial stability; restrictive monetary policies; nominal interest rates; money market; monetary framework; marginal reserve requirements; annual inflation rate; high inflation; transmission of monetary policy; long-term interest rates; real rate of interest; monetary regimes; optimal monetary policy; monetary measures; price stability; inflationary pressures; monetary policy decisions; inflation dynamics; monetary stances;

    References

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