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The natural rate of interest for an emerging economy: the case of Uruguay

Author

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  • Elizabeth Bucacos

    (Banco Central del Uruguay)

Abstract

Vast evidence indicates that the so-called natural rate of interest (NRI) has experienced a sustained fall in both advanced and emerging economies over the last 25 years. This situation threatens the central bank’s ability to guide relevant macroeconomic variables close to their welfare-maximizing path because the range of maneuver is reduced a great deal when interest rates descend to the zero lower bound. In this document, I provide an estimation of the natural interest rate for Uruguay, a small, open and dollarized emerging economy where the monetary policy instrument changes from interest rate to money aggregates in 2013, splitting the sample in two. The fundamentals-based model points a locus for the natural interest rate in the [0.98 2.06] range with 95 percent degree of certainty. This methodological approach is aimed at providing a novel framework for the Uruguayan case that allows to analyze the long-run fundamentals of the NIR and also to explain the reasons for short-run discrepancies between the real rate and its long-run equilibrium value. It is hoped that the fundamentals-based model adds to the myriad methods current in use at the Banco Central del Uruguay to estimate the NIR.

Suggested Citation

  • Elizabeth Bucacos, 2020. "The natural rate of interest for an emerging economy: the case of Uruguay," Documentos de trabajo 2020001, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2020001
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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/1.2020.pdf
    File Function: First version, 2020
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    More about this item

    Keywords

    interest rate determination; monetary policy; Uruguay;
    All these keywords.

    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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