Time-Varying Neutral Interest Rate—The Case of Brazil

 
Author/Editor: Roberto Perrelli ; Shaun K. Roache
 
Publication Date: May 12, 2014
 
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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: Emerging markets have experienced a sizeable decline in their neutral real interest rates until recently. In this paper we try to identify the main factors that contributed to it, with a focus on Brazil. We estimate an interval for Brazil’s time-varying neutral rate based on a range of structural and econometric models. We assess the implications of incorrectly estimating a time-varying neutral rate using a small structural model with a simple monetary policy instrument rule. We find that policy prescriptions are very different when facing uncertainty of neutral rate and of output gap. Our result contrasts sharply with Orphanides (2002), suggesting that the best response to neutral rate uncertainty is to ensure policy remains highly sensitive to inflation and output variations.
 
Series: Working Paper No. 14/84
Subject(s): Interest rates | Brazil | Inflation targeting | Monetary policy | Economic models

 
English
Publication Date: May 12, 2014
ISBN/ISSN: 9781484385210/1018-5941 Format: Paper
Stock No: WPIEA2014084 Pages: 32
Price:
US$18.00 (Academic Rate:
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