Equilibrium real interest rates and the financial cycle: Empirical evidence for Euro area member countries

Ansgar Belke and Jens Klose

Economic Modelling, 2020, vol. 84, issue C, 357-366

Abstract: We estimate the equilibrium real interest rate for nine Euro area member countries and the Euro area as a whole using quarterly data from 1995 to 2015. We expand the standard model of estimating real equilibrium interest rates to incorporate the financial cycle for the private sector. We show that adding the financial cycle indeed alters the equilibrium real interest rate estimates and, in line with previous studies, that there is a fall in the equilibrium real interest rate over time. Our results indicate that in most member countries the real rate is lower than its equilibrium level. Hence, they should not worry about secular stagnation now. This is because secular stagnation is likely to occur when real interest rates are higher than their equilibrium levels. This result can serve as a starting point for further research in this field, e.g. by adding public sector financial cycles or disentangling the roles of households, corporations and the government.

Keywords: Equilibrium real interest rate; Euro area; Financial cycle; Heterogeneity; Monetary policy; Secular stagnation (search for similar items in EconPapers)
JEL-codes: C32 E43 F45 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:84:y:2020:i:c:p:357-366

DOI: 10.1016/j.econmod.2019.04.025

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