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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| Language: | English |
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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 |
| Summary: | 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. |
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