Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies
With close to 30 emerging market and developing economies (EMDEs) using inflation targeting to determine monetary policy, and many of them for over 15 years, it is possible to create a meaningful measure of neutral real interest rates in these econ...
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World Bank, Washington, DC
2021
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| Online Access: | http://documents.worldbank.org/curated/en/893151624478783247/Neutral-Real-Interest-Rates-in-Inflation-Targeting-Emerging-and-Developing-Economies http://hdl.handle.net/10986/35831 |
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okr-10986-358312021-06-25T05:10:46Z Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies Ruch, Franz Ulrich EMERGING MARKET ECONOMIES INFLATION REAL INTEREST RATE MONETARY POLICY TAYLOR RULE DEVELOPING ECONOMIES NEUTRAL REAL INTEREST RATE ECONOMIC STIMULUS ECONOMIC SHOCK With close to 30 emerging market and developing economies (EMDEs) using inflation targeting to determine monetary policy, and many of them for over 15 years, it is possible to create a meaningful measure of neutral real interest rates in these economies. The neutral real interest rate provides policymakers with a benchmark for the interest rate at which economic activity reaches its full potential and inflation will stabilize. The deviation of policy rates from this neutral rate determines whether monetary policy is accommodative or restrictive. This paper provides aggregate estimates of the neutral rate in 20 of these economies. EMDEs have seen a decline in the neutral rate of 4 percentage points, from over 6 percent in 2000 to closer to 2 percent at the end of 2019; advanced economies saw an above 2 percentage point decline over this period. The decline of neutral real interest rates in EMDEs can only partially be related to domestic drivers of desired savings and investment. The secular decline in the neutral rate of interest is limiting the ability of EMDEs to stimulate economies in the face of large shocks. The neutral real interest rate is unobservable and subject to a high degree of uncertainty, double the size of that for advanced economies. With such high uncertainty determining the stance of monetary policy in these economies is a challenge. 2021-06-24T15:52:49Z 2021-06-24T15:52:49Z 2021-06 Working Paper http://documents.worldbank.org/curated/en/893151624478783247/Neutral-Real-Interest-Rates-in-Inflation-Targeting-Emerging-and-Developing-Economies http://hdl.handle.net/10986/35831 English Policy Research Working Paper;No. 9711 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
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Digital Repository |
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Foreign Institution |
| institution |
Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English |
| topic |
EMERGING MARKET ECONOMIES INFLATION REAL INTEREST RATE MONETARY POLICY TAYLOR RULE DEVELOPING ECONOMIES NEUTRAL REAL INTEREST RATE ECONOMIC STIMULUS ECONOMIC SHOCK |
| spellingShingle |
EMERGING MARKET ECONOMIES INFLATION REAL INTEREST RATE MONETARY POLICY TAYLOR RULE DEVELOPING ECONOMIES NEUTRAL REAL INTEREST RATE ECONOMIC STIMULUS ECONOMIC SHOCK Ruch, Franz Ulrich Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies |
| relation |
Policy Research Working Paper;No. 9711 |
| description |
With close to 30 emerging market and
developing economies (EMDEs) using inflation targeting to
determine monetary policy, and many of them for over 15
years, it is possible to create a meaningful measure of
neutral real interest rates in these economies. The neutral
real interest rate provides policymakers with a benchmark
for the interest rate at which economic activity reaches its
full potential and inflation will stabilize. The deviation
of policy rates from this neutral rate determines whether
monetary policy is accommodative or restrictive. This paper
provides aggregate estimates of the neutral rate in 20 of
these economies. EMDEs have seen a decline in the neutral
rate of 4 percentage points, from over 6 percent in 2000 to
closer to 2 percent at the end of 2019; advanced economies
saw an above 2 percentage point decline over this period.
The decline of neutral real interest rates in EMDEs can only
partially be related to domestic drivers of desired savings
and investment. The secular decline in the neutral rate of
interest is limiting the ability of EMDEs to stimulate
economies in the face of large shocks. The neutral real
interest rate is unobservable and subject to a high degree
of uncertainty, double the size of that for advanced
economies. With such high uncertainty determining the stance
of monetary policy in these economies is a challenge. |
| format |
Working Paper |
| author |
Ruch, Franz Ulrich |
| author_facet |
Ruch, Franz Ulrich |
| author_sort |
Ruch, Franz Ulrich |
| title |
Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies |
| title_short |
Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies |
| title_full |
Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies |
| title_fullStr |
Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies |
| title_full_unstemmed |
Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies |
| title_sort |
neutral real interest rates in inflation targeting emerging and developing economies |
| publisher |
World Bank, Washington, DC |
| publishDate |
2021 |
| url |
http://documents.worldbank.org/curated/en/893151624478783247/Neutral-Real-Interest-Rates-in-Inflation-Targeting-Emerging-and-Developing-Economies http://hdl.handle.net/10986/35831 |
| _version_ |
1764483866431586304 |