R-stars Across the Atlantic—The Role of Policy Expectations

Mátyás Farkas, Zoltan Jakab and Jesper Lindé

No 2026/168, IMF Working Papers from International Monetary Fund

Abstract: We study how policy expectations affect the estimated natural rate of interest (r*) for the United States and the euro area. To discipline policy expectations, we incorporate information on future policy rates and long-term yields in episodes when the Fed and ECB provided forward guidance. For the post-Covid period, we find that r* rises much more than in an otherwise standard specification that omits yield-curve observables. By implication, the post-Covid tightening of the monetary policy stance was not nearly as large as standard r* models imply, which helps explain why economic activity did not slow much when nominal policy rates were raised dramatically in 2022 to fight inflationary pressures. Yield-curve information pins down anticipated policy innovations and alters r* estimates and, thus, the monetary policy stance.

Keywords: Natural Rate of Interest; Bayesian Inference; DSGE Model; Monetary Policy Stance; Convenience Yield; Forward Guidance; Covid tightening; IMF working papers; yield-curve information; Policy expectation; Covid period; Central bank policy rate; COVID-19; Inflation; Dynamic stochastic general equilibrium models; Global (search for similar items in EconPapers)
Pages: 69
Date: 2026-08-07
New Economics Papers: this item is included in nep-dge and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=578665 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2026/168

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().