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

October 9, 2012

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Format: Chicago

Nicolas E Magud, and Evridiki Tsounta. To Cut or Not to Cut? That is the (Central Bank’s) Question In Search of the Neutral Interest Rate in Latin America, (USA: International Monetary Fund, 2012) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Central bank policy rate, Financial services, Inflation, Monetary policy, Monetary stance, Output gap, Prices, Production, Real interest rates

Keywords: Accommodative monetary policy, Central bank, Central bank policy rate, Economic growth, Global, Inflation, Interest rate gap, Interest rate hike, Interest rate observation, Macrorpudential policies, Monetary policy, Monetary policy rate, Monetary policy tightening, Monetary stance, Neutral interest rate, Output gap, Output gap estimate, Potential GDP, Rate of inflation, Real interest rate, Real interest rates, Stimulus withdrawal, Utility function, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/243
Stock No:

WPIEA2012243
ISBN:

9781475512502
ISSN:

1018-5941

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