Should the U.S. Federal Reserve increase the federal funds rate in 2016? An assessment based on the neutral interest rate

• Published in: Investigación económica 2016-04, Vol.75 (296), p.5-42
• Main Author: Vargas, Armando Sánchez
• Format: Article
• Language: English
• Subjects: ARTÍCULO PARA EL DEBATE CIENTÍFICO; cvar model; Econometrics; Economic modeling; Economic models; Economic policy; Economic recessions; Economics; Federal funds rate; Federal Reserve Bank; Federal Reserve monetary policy; Full employment; Inflation; Inflation rates; Interest rates; modelo cvar; Monetary policy; Neutral interest rate; Nominal interest rates; Recessions; Studies; tasa de interés de política cero; tasa de interés neutral; zero interest rate policy
• ISSN: 0185-1667; 2594-2360
• DOI: 10.1016/j.inveco.2016.07.002

This paper proposes an empirical method to estimate the value of the neutral interest rate in the U.S. and investigates whether the non-conventional monetary policy that has been in effect since the 2008 recession should continue. Specifically, a procedure is established based on a Cointegrated Vector Autoregression (cvar) model that enables us to conclude that the expansionary monetary policy could continue for at least three more years. Our estimates suggest that the neutral real rate, consistent with full employment and the inflation target in the U.S., will remain negative until 2018. This trend will continue until 2019, when the nominal neutral rate will reach a level of 2%, which remains below the pre-crisis level of 4%. In fact, it seems that the neutral rate has permanently shifted toward a lower level associated with the new fundamentals of the U.S. economy. Este artículo propone un método empírico para estimar el valor de la tasa de interés neutral de Estados Unidos (ee.uu.) e investiga si la política monetaria no convencional que ha estado en vigor desde la recisión de 2008 debe continuar. Específicamente, se establece un procedimiento basado en un modelo de vectores autorregresivos cointegrado (cvar) que nos permite concluir que la política monetaria expansiva podría continuar por lo menos tres años más. Nuestras estimaciones sugieren que la tasa real neutral, consistente con el pleno empleo y el objetivo de inflación de ee.uu., continuará siendo negativa hasta 2018. Esta tendencia continuará hasta 2019, cuando la tasa neutral nominal alcanzará un nivel de 2%, la cual permanecerá por debajo del nivel previo a la crisis, 4%. De hecho, pareciera que la tasa neutral se ha desplazado hacia un nivel menor asociado con los nuevos fundamentos de la economía norteamericana.