Carrillo, Julio A. Elizondo, Rocio Rodríguez-Pérez, Cid Alonso Roldán-Peña, Jessica
Year of Publication:
Working Papers No. 2018-22
Banco de México, Ciudad de México
Evidence suggests that potential growth and the neutral rate co-move in advanced economies. In contrast, this co-movement is not observed in emerging economies. We argue that capital flows may explain this behavior. We focus on Mexico, a benchmark emerging economy, and find that capital inflows may account for a temporary reduction in the Mexican neutral rate after the global financial crisis. These inflows surged during the implementation of unconventional monetary policies in advanced economies. In turn, low-frequency changes in the neutral rate may be attributed to increasing domestic savings, demographics, and a decreasing global long-run real interest rate. These results are largely consistent with other studies showing that the neutral rate has decreased in the last 25 years in advanced and emerging economies.
Neutral rate of interest emerging market economies transitory and structural factors