The natural rate of interest for an emerging economy: the case of Uruguay

Elizabeth Bucacos ()
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Elizabeth Bucacos: Banco Central del Uruguay

No 2020001, Documentos de trabajo from Banco Central del Uruguay

Abstract: Vast evidence indicates that the so-called natural rate of interest (NRI) has experienced a sustained fall in both advanced and emerging economies over the last 25 years. This situation threatens the central bank’s ability to guide relevant macroeconomic variables close to their welfare-maximizing path because the range of maneuver is reduced a great deal when interest rates descend to the zero lower bound. In this document, I provide an estimation of the natural interest rate for Uruguay, a small, open and dollarized emerging economy where the monetary policy instrument changes from interest rate to money aggregates in 2013, splitting the sample in two. The fundamentals-based model points a locus for the natural interest rate in the [0.98 2.06] range with 95 percent degree of certainty. This methodological approach is aimed at providing a novel framework for the Uruguayan case that allows to analyze the long-run fundamentals of the NIR and also to explain the reasons for short-run discrepancies between the real rate and its long-run equilibrium value. It is hoped that the fundamentals-based model adds to the myriad methods current in use at the Banco Central del Uruguay to estimate the NIR.

Keywords: interest rate determination; monetary policy; Uruguay (search for similar items in EconPapers)
JEL-codes: C10 E43 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-lam, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bku:doctra:2020001

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