Finally, the panel regression model looks at the drivers of the unobserved component in Laubach and Williams (2003) and includes dependency ratios, population growth, life expectancy, income inequality, the relative price of capital, sovereign risk spreads, global savings, and the U.S. neutral real interest rate.

# **7 Results**

This section presents results of the three estimation methods for aggregate EMDEs, the uncertainty around these results, the drivers of the neutral real interest rate, the stance of monetary policy in these EMDEs, and the role that monetary policy credibility may play. Results are presented for EMDEs as a whole aggregated using constant GDP at 2010 prices and market exchange rates. Limited data mean that TVP-VAR estimates are only provided for the ten EMDEs that started inflation targeting in the early 2000s. The economies covered in this paper include Albania, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Georgia, Hungary, Indonesia, India, Kazakhstan, Mexico, Paraguay, Peru, Philippines, Poland, Russia, South Africa, Thailand, and Turkey.

## **7.1 Neutral real interest rate estimates**

EMDEs saw a significant drop in neutral real interest rates since the early 2000s (figure 1). In 2000, the neutral real interest rate averaged an estimated 6.2 percent declining to 2.2 percent by the end of 2019.<sup>14</sup> Based on the Laubach-Williams definition of neutral, the decline was partially attributable to a fall in potential growth (Kilic Celik et al., 2020). Potential growth in EMDEs peaked at 4.4 percent in 2005, declining to 3.8 percent in 2019Q4. The rest, and the majority of the decline, was driven by the unobserved component _z_ –2 percentage points since 2005.

The decline in the neutral real interest rate has occurred in three-quarters of economies in the sample. Along with the decline in the neutral interest rate, the spread across countries has also declined–by more than half–over the sample period.

Estimates of the neutral real interest rate in EMDEs in this paper are higher than those found in Beyer and Milivojevic (2020), the only other available estimates for this group of countries. In the latter, the 2019 estimate for EMDEs is 0.5 percent, compared to the over 2 percent estimated here. Both estimates suggest a decline over time in the neutral real interest rate but by significantly different magnitudes.

The neutral real interest rate in EMDEs is statistically significantly higher than that of the United States. It averaged 3.8 percent in EMDEs since 2000. Over this same horizon Laubach and Williams (2003) estimate the neutral interest rate in the United States averaged 1.4 percent. In the early 2000s the gap between the two was 3.5 percentage points. However, over time this gap has declined to only 1.4 percentage points in 2019Q4.

## **7.2 Drivers of the neutral real interest rate**

The unobserved component of the Laubach-Williams model explains a significant portion of the decline in the neutral real interest rate in most EMDEs (see Pescatori and Turunen, 2015 and Beyer and Wieland,

> 14The EMDE aggregate is a weighted average using real GDP at 2010 prices and market exchange rates.

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