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Estimation and assessment of measures of the natural rate of interest: Evidence from Latin American economies with inflation targeting

Author

Listed:
  • Lahura, Erick

    (Banco Central de Reserva del Perú)

  • Vega, Marco

    (Banco Central de Reserva del Perú)

Abstract

We estimate and assess two measures of the natural rate of interest (NRI) for two Latin American economies, Chile and Peru, where monetary policy is conducted under inflation targeting. The first NRI measure is obtained through the estimation of a time varying parameter vector autoregression model with stochastic volatility (TVP-VAR-SV) as in Lubik y Matthes (2015), which we denote TVP-NRI. The second NRI measure is based on a recent methodology proposed by Benati (2020) and Benati (2023), which exploits the relationship between the interest rate and money velocity (Benati-NRI). In order to assess these two measures of NRI, we propose a new and simple criterion based on the idea that NRI is not expected to react to shocks that have no long-run effect on real interest rate (i.e. transitory shocks). The results for Chile and Peru indicate that TVP-NRI measures are relatively superior.

Suggested Citation

  • Lahura, Erick & Vega, Marco, 2023. "Estimation and assessment of measures of the natural rate of interest: Evidence from Latin American economies with inflation targeting," Working Papers 2023-014, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2023-014
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    More about this item

    Keywords

    Natural rate of interest; monetary policy; TVP-VARSV; money velocity; permanent and transitory shocks; LATAM-5;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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