Estimation of a Time Varying Natural Interest Rate for Peru

Abstract

Following the approach of Mésonnier and Renne (2007), we estimate a Natural Rate of Interest (NRI) using quarterly Peruvian data for the period 1996:3 - 2008:3. The model has six equations and it is estimated using the Kalman filter with output gap and NRI as unobservable variables. Estimation results indicate a more stable NRI in period 2001:3 - 2008:3 than in period 1996:3 - 2001:2 and also more stable than the observed real interest rate. Real interest rate gap (difference between real and natural rates), which measures monetary policy stance, indicates a restrictive policy for 1996-2001 and for 2003. Results also suggest a real interest rate greater than NRI for 2002 and for 2004-2008.Interest rate, natural interest rate, Kalman filter, output gap, unobservable components