Understanding the natural rate of interest for a small open economy
In this paper, we develop a structural model to estimate the current level of the natural rate for a small open economy, featuring a rich set of shocks to provide economic intuition for its underlying drivers. The model follows the New Keynesian tradition with several frictions and is able to draw i...
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| Format: | Article |
| Language: | English |
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Elsevier
2023-09-01
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| Series: | Latin American Journal of Central Banking |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S2666143823000145 |
| _version_ | 1797680748532072448 |
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| author | Carlos Alberto Zarazúa Juárez |
| author_facet | Carlos Alberto Zarazúa Juárez |
| author_sort | Carlos Alberto Zarazúa Juárez |
| collection | DOAJ |
| description | In this paper, we develop a structural model to estimate the current level of the natural rate for a small open economy, featuring a rich set of shocks to provide economic intuition for its underlying drivers. The model follows the New Keynesian tradition with several frictions and is able to draw implications for a monetary policy stance. In contrast to other DSGE models in the literature, this framework includes two main blocks—one related to the foreign sector and one associated with the local economy, linked by the uncovered interest rate parity condition. With this structure, the natural rate is affected by local and external factors, disaggregated in permanent and transitory shocks. Using Bayesian techniques, the model estimates the natural interest rate for two example cases, Mexico and Canada, considering data from these economies and the United States. Results show that the US economy is relevant to explaining natural rates in both countries. For the Mexican case, the drivers are shocks to the US risk premium and the marginal efficiency of investment, as well as country risk premium variations. For Canada, shocks to the households’ discount factor play an important role. |
| first_indexed | 2024-03-11T23:34:36Z |
| format | Article |
| id | doaj.art-378885b165da42b692448a6bf32bde04 |
| institution | Directory Open Access Journal |
| issn | 2666-1438 |
| language | English |
| last_indexed | 2024-03-11T23:34:36Z |
| publishDate | 2023-09-01 |
| publisher | Elsevier |
| record_format | Article |
| series | Latin American Journal of Central Banking |
| spelling | doaj.art-378885b165da42b692448a6bf32bde042023-09-20T04:21:52ZengElsevierLatin American Journal of Central Banking2666-14382023-09-0143100093Understanding the natural rate of interest for a small open economyCarlos Alberto Zarazúa Juárez0Directorate of Economic Studies, Banco de México, Av. 5 de Mayo, 18, Mexico City, Mexico.In this paper, we develop a structural model to estimate the current level of the natural rate for a small open economy, featuring a rich set of shocks to provide economic intuition for its underlying drivers. The model follows the New Keynesian tradition with several frictions and is able to draw implications for a monetary policy stance. In contrast to other DSGE models in the literature, this framework includes two main blocks—one related to the foreign sector and one associated with the local economy, linked by the uncovered interest rate parity condition. With this structure, the natural rate is affected by local and external factors, disaggregated in permanent and transitory shocks. Using Bayesian techniques, the model estimates the natural interest rate for two example cases, Mexico and Canada, considering data from these economies and the United States. Results show that the US economy is relevant to explaining natural rates in both countries. For the Mexican case, the drivers are shocks to the US risk premium and the marginal efficiency of investment, as well as country risk premium variations. For Canada, shocks to the households’ discount factor play an important role.http://www.sciencedirect.com/science/article/pii/S2666143823000145E40E47E49E52E58 |
| spellingShingle | Carlos Alberto Zarazúa Juárez Understanding the natural rate of interest for a small open economy Latin American Journal of Central Banking E40 E47 E49 E52 E58 |
| title | Understanding the natural rate of interest for a small open economy |
| title_full | Understanding the natural rate of interest for a small open economy |
| title_fullStr | Understanding the natural rate of interest for a small open economy |
| title_full_unstemmed | Understanding the natural rate of interest for a small open economy |
| title_short | Understanding the natural rate of interest for a small open economy |
| title_sort | understanding the natural rate of interest for a small open economy |
| topic | E40 E47 E49 E52 E58 |
| url | http://www.sciencedirect.com/science/article/pii/S2666143823000145 |
| work_keys_str_mv | AT carlosalbertozarazuajuarez understandingthenaturalrateofinterestforasmallopeneconomy |