Estimation of a Time Variying Natural Interest Rate for Peru

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. Results also show a negative interest rate gap onwards, suggesting a less restrictive policy.

Keywords
Interest Rate, Kalman Filter, Natural Interest Rate, Output Gap, Unobserved Components

JEL Classification
C32, E32, E43, E52