Modelling Short-term Interest Rates in the Euro Area Using Business Survey Data

Renata Grzeda Latocha () and Gernot Nerb

Journal of Business Cycle Measurement and Analysis, 2004, vol. 2004, issue 1, 43-69

Abstract: Interest rates play a key role in free market economies. According to the Taylor rule, shortterm interest rates depend on deviations of the current inflation rate from a normative value and of the output gap. Given the difficulty of observing the output gap, we postulate that alternative indicators of pressure on capacity should be monitored, especially those obtained from business surveys. Primarily, our work compares those empirically observed capacity utilization figures (CU) with the difference between actual and potential GDP, and tries to assess monetary policy on the basis of these indicators. The analysis of monetary policy is done in the first case by using a simple single equation framework and in a next step by using a more advanced vector autoregressive model. Given the fact that the survey measure of output gap captures only manufacturing and thus omits the important service sector which has a high share in value added we constructed a more comprehensive measure of capacity utilization (CU*). The new indicator is based on CU in manufacturing industry and on the confidence indicator for services...

Keywords: Short-term interest rates; Taylor rule; Output gap; Capacity utilization; Business confidence indicator in the service sector (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1787/jbcma-v2004-art4-en (text/html)
Full text available to READ online. PDF download available to OECD iLibrary subscribers.

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:oec:stdkaa:5lmqcr2jfbf6

Access Statistics for this article

More articles in Journal of Business Cycle Measurement and Analysis from OECD Publishing, Centre for International Research on Economic Tendency Surveys Contact information at EDIRC.
Bibliographic data for series maintained by ().