Time-Varying Neutral Interest Rate. The Case of Brazil

Produced by: 
International Monetary Fund
Available from: 
May 2014
Paper author(s): 
Roberto Perrelli
Shaun K. Roache
Topic: 
Macroeconomics - Economic growth - Monetary Policy
Year: 
2014

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.

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