Real interest rates and the ECB's monetary policy stance

Marco Bernardini, Lara D'Arrigo (), Alessandro Lin and Andrea Tiseno ()
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Lara D'Arrigo: Bank of Italy
Andrea Tiseno: Bank of Italy

No 857, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We present a new market-based measure of the short-term real interest rate in the euro area. Simple metrics based on the difference between 1-year Overnight Index Swap (OIS) and Inflation-Linked Swap (ILS) rates suffer from a timing mismatch stemming from the lagged indexation of ILS. Our measure addresses this issue by leveraging on Inflation Fixing Swaps (IFS), contracts linked to each of the next 24 releases of euro area inflation. Compared to the yearly maturity structure of ILS, the monthly maturities of IFS allow for a sharp time alignment of nominal interest rate and expected inflation, yielding a more accurate and reliable measure of the ex-ante short-term real interest rate as well of its expected evolution. We use this measure to provide a comprehensive analysis of the ECB's monetary policy stance during the post-pandemic era.

Keywords: monetary policy stance; real interest rates; natural rate; inflation expectations (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Date: 2024-06
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_857_24

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