{
  "title": "Policy Interest Rates in Latin America: Moving to Neutral?",
  "publication": "IMF Blog, November 19, 2012",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2012/11/19/policy-interest-rates-in-latin-america-moving-to-neutral",
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  "summary": "The neutral interest rate is defined as \"the real interest rate consistent with the economy operating at full employment and stable inflation.\"",
  "sections": [
    {
      "heading": "Real interest rates and the neutral concept",
      "content": "- The neutral interest rate is defined as \"the real interest rate consistent with the economy operating at full employment and stable inflation.\"\n- Policy guidance: \n  - If the economy operates above potential and inflation is rising, policymakers should raise the policy interest rate above the neutral level.\n  - If the economy operates below full employment, interest rates may need to be lowered below the neutral level."
    },
    {
      "heading": "Estimating neutral rates",
      "content": "- Study scope and methods:\n  - Neutral interest rates are unobservable; no single best method exists.\n  - The study estimates neutral interest rates for 10 Latin American countries using several different methodologies to obtain a range of plausible values for each country.\n- Sample composition:\n  - Countries with full-fledged inflation targeting: Brazil, Chile, Colombia, Mexico, Peru, and Uruguay.\n  - Countries that recently transitioned to inflation targeting: Costa Rica, the Dominican Republic, Guatemala, and Paraguay.\n- Key empirical findings:\n  - Financially developed economies with a longer history of inflation targeting typically have lower neutral interest rates.\n  - These countries tend to have stronger economic fundamentals (for example, lower inflation uncertainty and sovereign risk premiums measured by JP Morgan’s Emerging Market Bond Index (EMBI) spreads).\n  - Notable exception: Brazil has the neutral rate among the highest in emerging economies.\n  - Stronger economic fundamentals and the easing of global financial conditions (reflected in lower federal funds rates) have produced a downward trend in neutral interest rates, with recent exceptions being Brazil and Uruguay."
    },
    {
      "heading": "Comparing actual policy rates to estimated neutral rates",
      "content": "- Countries where current policy rates are close to neutral:\n  - Chile\n  - Colombia\n  - Peru\n- Countries where monetary policy remains stimulative (actual interest rates below neutral):\n  - Brazil\n  - Mexico\n- Countries where actual interest rates are below estimated neutral levels (with caution due to data limitations and weaker transmission):\n  - Costa Rica\n  - The Dominican Republic\n  - Guatemala\n  - Paraguay\n  - Uruguay"
    },
    {
      "heading": "Policy implications and challenges",
      "content": "- Monetary policy decisions are challenging owing to many unknowns such as:\n  - The position of the economy in the business cycle.\n  - Likely future economic shocks.\n  - A volatile external environment.\n- Reliable estimates of country-specific neutral rates can help central bankers in Latin America set the course for monetary policy.\n\nNicolas Magud, Evridiki Tsounta — November 19, 2012\n\n---\n\n Content in this bundle\n\n- On Neutral Interest Rates in Latin America\n  - On Neutral Interest Rates in Latin America (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - On Neutral Interest Rates in Latin America (PDF){rel=\"external\" type=\"application/pdf\"}\n- wp12243\n  - wp12243 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp12243 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- inflation\n- inflation target\n- monetary policy\n- https://www.imf.org/wp-content/uploads/2012/11/eng-neutral-int-rates-chart1.jpg\n- https://www.imf.org/wp-content/uploads/2012/11/eng-neutral-int-rates-chart2.jpg\n\nSource: https://www.imf.org/en/blogs/articles/2012/11/19/policy-interest-rates-in-latin-america-moving-to-neutral"
    }
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    "Authors: Nicolas Magud, Evridiki Tsounta",
    "Published: November 19, 2012",
    "The neutral interest rate is defined as \"the real interest rate consistent with the economy operating at full employment and stable inflation.\"",
    "Policy guidance:",
    "Study scope and methods:",
    "Sample composition:",
    "Key empirical findings:",
    "Countries where current policy rates are close to neutral:",
    "Countries where monetary policy remains stimulative (actual interest rates below neutral):",
    "Countries where actual interest rates are below estimated neutral levels (with caution due to data limitations and weaker transmission):",
    "Monetary policy decisions are challenging owing to many unknowns such as:",
    "Reliable estimates of country-specific neutral rates can help central bankers in Latin America set the course for monetary policy.",
    "**On Neutral Interest Rates in Latin America**",
    "**wp12243**",
    "[inflation](http://www.imf.org/external/pubs/ft/fandd/basics/inflat.htm)",
    "[inflation target](http://www.imf.org/external/pubs/ft/fandd/basics/target.htm)",
    "[monetary policy](http://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm)",
    "[https://www.imf.org/wp-content/uploads/2012/11/eng-neutral-int-rates-chart1.jpg](https://www.imf.org/wp-content/uploads/2012/11/eng-neutral-int-rates-chart1.jpg)",
    "[https://www.imf.org/wp-content/uploads/2012/11/eng-neutral-int-rates-chart2.jpg](https://www.imf.org/wp-content/uploads/2012/11/eng-neutral-int-rates-chart2.jpg)"
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