IMF Working Papers

Estimating the Neutral Interest Rate in the Kyrgyz Republic

By Iulia Ruxandra Teodoru, Asel Toktonalieva

June 5, 2020

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Iulia Ruxandra Teodoru, and Asel Toktonalieva. Estimating the Neutral Interest Rate in the Kyrgyz Republic, (USA: International Monetary Fund, 2020) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper estimates the neutral interest rate in the Kyrgyz Republic using a range of methodologies. Results indicate that the real neutral rate is about 4 percent based on an average of models and 3.7 percent based on a Quarterly Projection Model. This is higher than in many emerging markets and is likely explained by higher public debt and an elevated risk premium, low creditor rights and contractual enforcement, and low domestic savings. The use of an estimate of the neutral interest rate provides useful guidance to monetary policy and enhances transparency and independence of the central bank. Our estimate provides a quantitative benchmark for the monetary policy stance in the context of a central bank that is building analytical capacity, integrating additional insights in its decision-making process, and working to improve its communication. Strengthening the monetary transmission mechanism will be critical to enhance the effectiveness of monetary policy, including by allowing more exchange rate flexibility to support the transition to a full-fledged inflation targeting regime, and reducing excess liquidity to enhance the credit channel, reducing dollarization and high interest rate spreads that adversely affect the transmission of the policy rate to the economy.

Subject: Central bank policy rate, Exchange rates, Financial services, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production, Real interest rates

Keywords: Central bank policy rate, Effectiveness of monetary policy, Exchange rates, Federal funds rate, Food inflation, General equilibrium model, Global, Inflation, Inflation expectation, Inflation target, Inflation targeting, Interest rate, Interest rate gap, Middle East and Central Asia, Monetary policy stance, Neutral interest rate, Neutral rate, Output gap, Policy rate, Quarterly projection model, Real interest rates, Risk premium, Taylor rule, Transmission mechanism, WP

Publication Details

  • Pages:

    29

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2020/087

  • Stock No:

    WPIEA2020087

  • ISBN:

    9781513536934

  • ISSN:

    1018-5941

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