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What Determines the Neutral Rate of Interest in an Emerging Economy?

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  • Carrillo Julio A.
  • Elizondo Rocío
  • Rodríguez-Pérez Cid Alonso
  • Roldán-Peña Jessica

Abstract

Evidence suggests that potential growth and the neutral rate co-move in advanced economies. In contrast, this co-movement is not observed in emerging economies. We argue that capital flows may explain this behavior. We focus on Mexico, a benchmark emerging economy, and find that capital inflows may account for a temporary reduction in the Mexican neutral rate after the global financial crisis. These inflows surged during the implementation of unconventional monetary policies in advanced economies. In turn, low-frequency changes in the neutral rate may be attributed to increasing domestic savings, demographics, and a decreasing global long-run real interest rate. These results are largely consistent with other studies showing that the neutral rate has decreased in the last 25 years in advanced and emerging economies.

Suggested Citation

  • Carrillo Julio A. & Elizondo Rocío & Rodríguez-Pérez Cid Alonso & Roldán-Peña Jessica, 2018. "What Determines the Neutral Rate of Interest in an Emerging Economy?," Working Papers 2018-22, Banco de México.
  • Handle: RePEc:bdm:wpaper:2018-22
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    Cited by:

    1. repec:chb:bcchni:v:20:y:2017:i:3:p:120-143 is not listed on IDEAS
    2. Akinci, Ozge & Queralto, Albert, 2018. "Exchange rate dynamics and monetary spillovers with imperfect financial markets," Staff Reports 849, Federal Reserve Bank of New York, revised 01 May 2019.

    More about this item

    Keywords

    Neutral rate of interest; emerging market economies; transitory and structural factors;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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