Searching for the natural rate of interest: a euro area perspective

Jesús Cuaresma (), Ernest Gnan () and Doris Ritzberger-Gruenwald ()

Economic Change and Restructuring, 2004, vol. 31, issue 2, 185-204

Abstract: A time-varying natural rate of interest is estimated for the euro area using a multivariate unobserved components model. The problem of aggregating interest rate data for the pre-EMU period is directly addressed, and a simple method is proposed in order to adjust the risk premia in the interest rate data prior to 1999. We show that, for the pre-EMU period, using risk-unadjusted policy rates leads to periods of high risk premia being erroneously taken as monetary policy replies to the output gap; in contrast, using risk-adjusted policy rates yields an estimate of the reaction of monetary policy to the output gap corresponding approximately to an increase of 40 basis points for a 1%positive deviation of output from potential output. A positive deviation of inflation from its trend of 1%is estimated to have triggered an approximately 1.2%increase in short-term interest rates. Copyright Kluwer Academic Publishers 2004

Keywords: Natural rate of interest; unobserved components models; monetary policy; Taylor rule (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (32)

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DOI: 10.1007/s10663-004-0914-5

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