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Estimations of the natural rate of interest in Colombia

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Abstract

Three methodologies to estimate the natural interest rate, NIR, are implemented for the Colombian economy. Two methods are statistical filters and the third involves some economic theory. The first method is based on unobserved components decomposition of the real interest rate and explores the statistical characteristics of the data. The second is a multivariate version of the Hodrick-Prescott filter augmented by an economic relationship, HPMV. The NIR in both cases is defined as the trend component of the market real interest rate; then, the NIR may be considered as a long-run real interest rate anchor for monetary policy. The third method consists in estimating a semi-structural model for a small open economy. In this case the NIR is defined as the interest rate that does not affect the output dynamics in the short run and assures output and inflation convergence to their long run equilibriums. This implies that the NIR is a medium-run anchor for monetary policy. Three features are observed in the dynamics of the NIR estimates for the period 2000-2009. The first part of the sample (2000-2003) shows a downward trend, followed by a period of stabilization and upward trend (2004-2008) and at the end of the sample the NIR start decreasing again. The NIR in the last quarter of the sample, 2009Q2, is around 3.1 in average.

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  • Eliana González & Luis F. Melo & Luis E. Rojas & Brayan Rojas, 2010. "Estimations of the natural rate of interest in Colombia," Borradores de Economia 7667, Banco de la Republica.
    • Handle: RePEc:col:000094:007667
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    Cited by:

    1. Bustamante, Christian & Hamann, Franz, 2015. "Countercyclical reserve requirements in a heterogeneous-agent and incomplete financial markets economy," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 55-70.
    2. Christian Bustamante, 2011. "Política monetaria contracíclica y encaje bancario," Borradores de Economia 8202, Banco de la Republica.
    3. Andrés González & Segio Ocampo & Julián Pérez & Diego Rodríguez, 2013. "Output Gap and Neutral Interest Measures of Colombia," Monetaria, CEMLA, vol. 0(2), pages 231-286, July-Dece.
    4. Martha López & Fernando Tenjo & Hector Zárate, 2012. "The Risk-taking Channel in Colombia Revisited," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 30(68), pages 276-295, June.
    5. Christian Bustamante & Luis E. Rojas, 2012. "Constant-Interest-Rate Projections and Its Indicator Properties," Borradores de Economia 696, Banco de la Republica de Colombia.
    6. Mr. Nicolas E Magud & Ms. Evridiki Tsounta, 2012. "To Cut or Not to Cut? That is the (Central Bank’s) Question In Search of the Neutral Interest Rate in Latin America," IMF Working Papers 2012/243, International Monetary Fund.

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    More about this item

    Keywords

    Natural Rate of Interest; Unobserved Components Models; Hodrick-Prescott Filter; Semi-structural models.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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