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Natural Real Interest Rate in an Open Small Economy: the Costa Rica´s Case

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  • Carlos Segura-Rodriguez

    (Department of Economic Research, Central Bank of Costa Rica)

Abstract

This study updates the Costa Rica’s natural real interest rate (NRIT) estimate for the period between 2010’s first quarter and 2023’s third quarter. I use two different methodologies for this estimation: Holston, Laubach and Williams (2023)’s semi-structural model and a structural VAR proposed by Brzoza-Brzezina (2002). This study’s methodological contribution is to estimate an extension of Holston-Laubach-Williams framework to incorporate conditions that are inherent in an open and small economy. The main result is that the natural real interest rate has oscilated between 1, 18% and 1, 47% during the period in analysis, and has been in the interval between 1, 36% and 1, 44% after 2022. Further, I check that the real interest rate gap correlation with other economic variables, like output gap, inflation and real exchange gap, shows a sign that is expected. Finally, I conclude that the Central Bank’s monetary policy has been consistent with its objective of maintaning a low inflation.

Suggested Citation

  • Carlos Segura-Rodriguez, 2024. "Natural Real Interest Rate in an Open Small Economy: the Costa Rica´s Case," Notas Técnicas 2403, Banco Central de Costa Rica.
    • Handle: RePEc:apk:nottec:2403
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    File URL: https://repositorioinvestigaciones.bccr.fi.cr/handle/20.500.12506/394
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    References listed on IDEAS

    as
    1. Michał Brzoza-Brzezina, 2002. "Estimating the Natural Rate of Interest: A SVAR Approach," NBP Working Papers 27, Narodowy Bank Polski.
    2. John C. Williams, 2023. "Measuring the Natural Rate of Interest: Past, Present, and Future," Speech 96178, Federal Reserve Bank of New York.
    3. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    5. Kathryn Holston & Thomas Laubach & John C. Williams, 2023. "Measuring the Natural Rate of Interest after COVID-19," Staff Reports 1063, Federal Reserve Bank of New York.
    6. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    7. Thomas Laubach & John C. Williams, 2015. "Measuring the natural rate of interest redux," Working Paper Series 2015-16, Federal Reserve Bank of San Francisco.
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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