Measuring the natural rate of interest in a commodity exporting economy: Evidence from Mongolia

International Economics

Munkhbayar Gantumur, Gan-Ochir Doojav

C32, E32, E43, E52, F41, C11

Bayesian analysis, External shocks, Monetary policy, Open economy macroeconomics, Natural rate of interest

This paper examines the fundamental drivers of the natural rate of interest in a commodity-exporting economy (Mongolia) based on a structural New Keynesian model that incorporates external factors such as demand for commodity exports, commodity price, and FDI, using Bayesian techniques. Our empirical analysis resulted in the following novel findings. First, we find evidence of transitory shocks to the real natural rate of interest. Second, we show that the estimated real natural rate of interest is procyclical. It declined during 2012–2016 and has been gradually recovering since 2017. The monetary policy stance has been neutral since mid-2017. Third, due to the characteristics of the Mongolian economy, the natural rate of interest remains at double-digit, thus explains high interest rate in the country. Fourth, our findings highlight that external shocks (i.e., spillovers from the global commodity market) are the main determinants of the real natural rate of interest, as they account for 40 percent of its fluctuations. Consequently, the external shocks mainly transmit through the equilibrium real exchange rate.