The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds

Jens Christensen and Sarah Mouabbi

No 2024-08, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The so-called equilibrium or natural rate of interest, widely known as r*t, is a key variable used to judge the stance of monetary policy. We offer a novel euro-area estimate based on a dynamic term structure model estimated directly on the prices of bonds with cash flows indexed to the euro-area harmonized index of consumer prices with adjustments for bond-specific risk and real term premia. Despite a recent increase, our estimate indicates that the natural rate in the euro area has fallen about 2 percentage points on net since 2002 and remains negative at the end of our sample. We also devise a related measure of the stance of monetary policy, which suggests that monetary policy in the euro area was not accommodative at the height of the COVID-19 pandemic.

Keywords: affine arbitrage-free term structure model; financial markets; frictions; monetary policy; rstar; covid19 (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 G12 (search for similar items in EconPapers)
Pages: 45
Date: 2024-03-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
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Working Paper: The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:97927

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DOI: 10.24148/wp2024-08

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