Neutral Interest Rate: A Statistical Estimation

Alfredo Coutiño

Published: June 2021

Monetary space is a measure of how close or far away current monetary policy is from the level of neutrality, the condition at which policy is neither restrictive nor expansive. The estimate of monetary space provides a useful metric for policymakers to calibrate monetary conditions at any time and throughout the business cycle, since it shows the degree of restriction or stimulation present in current monetary conditions. Since monetary stance depends on both the price and the quantity of money, the monetary space is more limited in countries with single mandate than in those with dual mandate. In this article we present a statistical approach to estimating the stance and space of monetary policy based on the price of money. Mexico is presented as a study case.

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