Abstract

SANCHEZ VARGAS, Armando. Estimation of the neutral interest rate, unemployment and inflation in Mexico. Inv. Econ [online]. 2020, vol.79, n.311, pp.35-53.  Epub Apr 21, 2020. ISSN 0185-1667.  https://doi.org/10.22201/fe.01851667p.2020.311.72434.

What are the transmission mechanisms determining the neutral rate of interest that serves as a reference to establish the monetary policy stance of the Central Bank? We analyze the role of unemployment and inflation in determining such neutral rate. We conclude that the Banco de México could take a more expansive monetary policy stance without generating inflationary pressures. The rate is calculated using two methods: 1) the Taylor rule and a cointegrated simultaneous equations system and 2) the interest rate parity. Our results suggest that the neutral interest rate changes through two mechanisms: 1) indirectly when there is a variation in the unemployment rate, which generates a change in inflation and, therefore, a shift in the neutral rate and 2) directly when there is a reduction in the Gross Domestic Product gap.

Keywords : Simultaneous equation model; neutral interest rate; monetary policy.

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