The determination of the natural rate of interest: does the total factor productivity matter?

The joint dynamics of the natural rate of interest and total factor productivity (TFP) constitute a key structural determinant with significant economic relevance for households and firms, as well as for policy decision-making – particularly by central bank authorities. The hypothesis that increases in TFP are associated with declines in the natural rate of interest is tested and supported using time-series data for the Brazilian economy over the period from February 2003 to December 2022. The natural rate of interest is estimated through a parsimonious model employing the Kalman filter, while TFP is measured using growth accounting techniques. Incorporating additional control variables and cointegration methods (VEC and augmented ARDL, Sam et al., 2019), the empirical evidence suggests that Brazil’s natural rate of interest is negatively affected by long-run changes in TFP, and positively influenced by the trend GDP growth rate, the sovereign risk premium, and - less robustly - by U.S. real interest rates. Besides, a quantile approach identified changes in the elasticities over the natural rate of interest’s distribution. JEL.: E43; F43; O47.