Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336374 
Year of Publication: 
2023
Citation: 
[Journal:] Latin American Journal of Central Banking (LAJCB) [ISSN:] 2666-1438 [Volume:] 4 [Issue:] 3 [Article No.:] 100093 [Year:] 2023 [Pages:] 1-25
Publisher: 
Elsevier, Amsterdam
Abstract: 
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.
Subjects: 
Central banking
Interest rates
Monetary policy
JEL: 
E40
E47
E49
E52
E58
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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