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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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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Jean-Paul Lam, 2004. "Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General-Equilibrium Framework," Working Papers 04-9, Bank of Canada.
    2. Andrés González & Segio Ocampo & Julián Pérez & Diego Rodríguez, 2013. "Output Gap and Neutral Interest Measures of Colombia," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 231-286, July-Dece.
    3. Javier Andrés & David López-Salido & Edward Nelson, 2008. "Money and the natural rate of interest: structural estimates for the United States and the euro area," Banco de Espa�a Working Papers 0805, Banco de Espa�a.
    4. Eliana González & Luis F. Melo & Luis E. Rojas & Brayan Rojas, . "Estimations of the natural rate of interest in Colombia," Borradores de Economia 626, Banco de la Republica de Colombia.
    5. Nicolas E. Magud & Carmen M. Reinhart & Esteban R. Vesperoni, 2011. "Capital Inflows, Exchange Rate Flexibility, and Credit Booms," NBER Working Papers 17670, National Bureau of Economic Research, Inc.
    6. José Luis Torres, 2007. "La estimación de la brecha del producto en Colombia," BORRADORES DE ECONOMIA 004288, BANCO DE LA REPÚBLICA.
    7. Katharine S. Neiss & Edward Nelson, 2001. "The real interest rate gap as an inflation indicator," Bank of England working papers 130, Bank of England.
    8. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, December.
    9. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2002. "Inflation Targeting in Brazil: Lessons and Challenges," Working Papers Series 53, Central Bank of Brazil, Research Department.
    10. Rossini, Renzo & Quispe, Zenon & Rodriguez, Donita, 2011. "Capital Flows, Monetary Policy and FOREX Interventions in Peru," Working Papers 2011-008, Banco Central de Reserva del Perú.
    11. Malin Adolfson & Stefan Laséen & Jesper Lindé & Lars E.O. Svensson, 2011. "Optimal Monetary Policy in an Operational Medium‐Sized DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1287-1331, October.
    12. Hakan Kara & Fethi Ogunc & Umit Ozlale & Cagri Sarikaya, 2007. "Estimating the Output Gap in a Changing Economy," Southern Economic Journal, Southern Economic Association, vol. 74(1), pages 269-289, July.
    13. Humala, Alberto & Rodríguez, Gabriel, 2009. "Estimation of a Time Varying Natural Interest Rate for Peru," Working Papers 2009-009, Banco Central de Reserva del Perú.
    14. Robert J. Barro & Rachel McCleary, 2003. "Religion and Economic Growth," NBER Working Papers 9682, National Bureau of Economic Research, Inc.
    15. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2006. "Measuring the Natural Interest Rate for the Peruvian Economy," Working Papers 2006-003, Banco Central de Reserva del Perú.
    16. D. Filiz Unsal, 2013. "Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 233-285, March.
    17. Rodrigo Fuentes & Fabián Gredig, 2007. "Estimating the Chilean Natural Rate of Interest," Working Papers Central Bank of Chile 448, Central Bank of Chile.
    18. Giammarioli, Nicola & Valla, Natacha, 2004. "The natural real interest rate and monetary policy: a review," Journal of Policy Modeling, Elsevier, vol. 26(5), pages 641-660, July.
    19. Alex Segura-Ubiergo, 2012. "The Puzzle of Brazil's High Interest Rates," IMF Working Papers 12/62, International Monetary Fund.
    20. International Monetary Fund, 2012. "Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America," IMF Working Papers 12/142, International Monetary Fund.
    21. Fethi Oğunc & Inci Batmaz, 2009. "Estimating the neutral real interest rate in an emerging market economy," Applied Economics, Taylor & Francis Journals, vol. 43(6), pages 683-693.
    22. 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, vol. 5(2), pages 65-72.
    23. Marianne E. Page & Ann Huff Stevens, 2002. "Will You Miss Me When I Am Gone? The Economic Consequences of Absent Parents," NBER Working Papers 8786, National Bureau of Economic Research, Inc.
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