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Time-Varying Neutral Interest Rate—The Case of Brazil

Author/Editor: Roberto Perrelli | Shaun K. Roache
Authorized for Distribution: May 12, 2014
Electronic Access: Free Full Text (PDF file size is 1,040KB)
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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.
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Series: Working Paper No. 14/84
Subject(s): Interest rates | Brazil | Inflation targeting | Monetary policy | Economic models
    Published:   May 12, 2014        
    ISBN/ISSN:   9781484385210/1018-5941   Format:   Paper
    Stock No:   WPIEA2014084   Pages:   32
    Price:   US$18.00
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