To Cut or Not to Cut? That is the (Central Bank’s) Question In Search of the Neutral Interest Rate in Latin America
IMF Working Papers, October 9, 2012
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Bibliographic details
- Authors: Nicolas E Magud, Evridiki Tsounta
- Published: October 9, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475512502.001
Overview
- Authors: Nicolas E Magud, Evridiki Tsounta
- Publication date: October 9, 2012
- Central focus: Estimation of neutral real interest rate (NRIR) ranges for 10 Latin American countries with recent or established inflation targeting regimes.
- Core conclusion: NRIRs have declined in the last decade; more economically and financially developed economies exhibit lower NRIR levels.
Key findings
- NRIR trends
- NRIRs have declined in the last decade.
- More economically and financially developed economies exhibit lower NRIR levels.
- Monetary stance assessment
- Based on estimated NRIRs, 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.
- Predictive value of interest rate gap
- The interest rate gap can be a good predictor of future inflation dynamics and economic growth.
- Macro-prudential interaction
- Evidence from recent experiences in Brazil and Peru suggests macro-prudential policies could affect the monetary stance even in the absence of direct interest rate changes, through affecting the NRIR.
Methodology
- Scope: 10 Latin American countries that either have full-fledged inflation targeting regimes in place or have recently adopted them.
- Approach: Uses an array of methodologies commonly used in the literature to estimate NRIR ranges.
- Metrics emphasized: neutral real interest rate (NRIR), interest rate gap, output gap, inflation dynamics, economic growth.
Policy implications and recommendations
- Interest rate policy
- Use estimated NRIR ranges to assess whether the monetary stance is neutral, accommodative, or restrictive.
- Monitor interest rate gap as an indicator and predictor of future inflation and growth dynamics.
- Macro-prudential policy
- Recognize that macro-prudential measures can shift NRIR and thereby alter the effective monetary stance even without nominal policy rate changes.
- Country-specific application
- Tailor monetary and macro-prudential coordination to country-specific NRIR estimates and development level, given that more developed economies displayed lower NRIRs in the study.