TAILIEUCHUNG - To Cut or Not to Cut? That is the (Central Bank’s) Question In Search of the Neutral Interest Rate in Latin America

The success of non-profits stems from the support of social investors, whether individuals or institutions, who have turned to microfinance in a big way: in 2007, such investors put $4 billion into microfinance (CGAP, 2008), a total that has been rising fast. Social investors range from international financial institutions like the World Bank’s International Finance Corporation to major mutual fund families like TIAA-CREF, in addition to individuals investing $100 or so (at zero financial return) through internet-based sites like . But even if called “investors,” ultimately they also provide subsidies (equal to the size of the investment multiplied. | To Cut or Not to Cut That is the Central Bank s Question In Search of the Neutral Interest Rate in Latin America Nicolas E. Magud and Evridiki Tsounta INTERNATIONAL MONETARY FUND 2012 International Monetary Fund WP 12 243 IMF Working Paper Western Hemisphere Department To Cut or Not to Cut That is the Central Bank s Question In Search of the Neutral Interest Rate in Latin America1 Prepared by Nicolas E. Magud and Evridiki Tsounta Authorized for distribution by Charles Kramer October 2012 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author s and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author s and are published to elicit comments and to further debate. Abstract This paper estimates neutral real interest rate NRIR ranges for 10 Latin American countries that either have full-fledged inflation targeting regimes in place or have recently adopted them using an array of methodologies commonly used in the literature. We find that NRIRs have declined in the last decade with more economically and financially developed economies exhibiting lower NRIR levels. Based on the estimated NRIRs we assess that the current monetary stance measured by the interest rate gap is appropriately neutral in most of the considered economies in line with closing output gaps. We also observe that the interest rate gap can be a good predictor of future inflation dynamics and economic growth. In addition looking at the recent experiences in Brazil and Peru we suggest that macro-prudential policies could affect the monetary stance even in the absence of direct interest rate changes through affecting the NRIR. JEL Classification Numbers E43 E52 E58 E61 Keywords central bank neutral interest rate monetary stance macrorpudential policies Authors E-Mail Addresses nmagud@ etsounta@ 1 The paper has benefited from the insightful

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