Time-Varying Neutral Interest Rate—The Case of Brazil
May 12, 2014
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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.
Subject: Central bank policy rate, Financial services, Inflation, Output gap, Potential output, Prices, Production, Real interest rates
Keywords: Central bank policy rate, equilibrium real interest rate, Global, Inflation, inflation expectation, inflation gap, inflation surprise, inflation targeting regime, inflation variability, interest rate gap, Natural rate of interest, neutral rate, Output gap, policy rate reduction, Potential output, rate uncertainty, Real interest rates, small monetary model, WP
Pages:
32
Volume:
2014
DOI:
Issue:
084
Series:
Working Paper No. 2014/084
Stock No:
WPIEA2014084
ISBN:
9781484385210
ISSN:
1018-5941
