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Searching for the Natural Rate of Interest: A Euro-Area Perspective

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Author Info
Jesus Crespo Cuaresma () (Department of Economics, University of Vienna, Bruennerstrasse 72, A-1210 Vienna (Austria))
Ernest Gnan () (Oesterreichische Nationalbank)
Doris Ritzberger-Gruenwald () (Oesterreichische Nationalbank)

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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 in order to adjust the risk premia in the interest rate data prior to 1999 is proposed. 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; by 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 approximately a 1.2% increase in short-term interest rates.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 84.

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Length: 33 pages
Date of creation: 21 Jul 2003
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Handle: RePEc:onb:oenbwp:84

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Keywords: Natural rate of interest unobserved components models monetary policy Taylor rule

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Microeconomic Data
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  4. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278. [Downloadable!] (restricted)
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  5. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept. [Downloadable!] (restricted)
  6. Michał Brzoza-Brzezina, 2006. "The information content of the neutral rate of interest," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(2), pages 391-412, 04. [Downloadable!] (restricted)
  7. Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Papers in Applied Economic Theory 2003-01, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  8. Hans Christiansen & Charles Pigott, 1997. "Long-Term Interest Rates in Globalised Markets," OECD Economics Department Working Papers 175, OECD Economics Department. [Downloadable!]
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  11. Nicola Giammarioli & Natacha Valla, 2003. "The natural real rate of interest in the Euro area," Working Paper Series 233, European Central Bank. [Downloadable!]
  12. Frank Smets & Rafael Wouters, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Lombardi & Silvia Sgherri, 2007. "(Un)naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate," DNB Working Papers 142, Netherlands Central Bank, Research Department. [Downloadable!]
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  2. Michal Brzoza-Brzezina, 2004. "The Information Content of the Natural Rate of Interest: The Case of Poland," Macroeconomics 0402007, EconWPA. [Downloadable!]
  3. Ignacio Briones & André Villela, 2006. "European Banks and their Impact on the Banking Industry in Chile and Brazil: 1862 - 1913," Working Papers 108, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  4. Tetsuji Okazaki, 2006. "Micro-aspects of Monetary Policy in Pre-war Japan: Lender of Last Resort and Selection of Banks," CIRJE F-Series CIRJE-F-398, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  5. Tomás Slacík, . "(How) Will the Euro Affect Inflation in the Czech Republic? A contribution to the current debate," FIW Working Paper series 018, FIW. [Downloadable!]
  6. Odia Ndongo, Yves Francis, 2006. "Datation du Cycle du PIB Camerounais entre 1960 et 2003," MPRA Paper 552, University Library of Munich, Germany. [Downloadable!]
  7. Rubio, Fernando, 2006. "Estructura de financiamiento: ¿cuánta deuda debería incorporar en mi empresa?," MPRA Paper 578, University Library of Munich, Germany, revised 21 May 2006. [Downloadable!]
  8. Julien Garnier & Bjørn-Roger Wilhelmsen, 2005. "The natural real interest rate and the output gap in the euro area - a joint estimation," Working Paper Series 546, European Central Bank. [Downloadable!]
    Other versions:
  9. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2006. "Measuring the Natural Interest Rate for the Peruvian Economy," Working Papers 2006-003, Banco Central de Reserva del Perú. [Downloadable!]
  10. Michal Brzoza-Brzezina, 2005. "Lending Booms in Europe’s Periphery: South-Western Lessons for Central-Eastern Members," Macroeconomics 0502002, EconWPA. [Downloadable!]
  11. Roger Guesnerie, 2006. "De l'utilité du calcul économique public," PSE Working Papers 2006-06, PSE (Ecole normale supérieure). [Downloadable!]
  12. Roman Horváth, 2006. "Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic," William Davidson Institute Working Papers Series wp848, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  13. Jean-Stéphane MESONNIER, 2007. "The predictive content of the real interest rate gap for macroeconomic variables in the euro area," Money Macro and Finance (MMF) Research Group Conference 2006 102, Money Macro and Finance Research Group. [Downloadable!]
  14. Michal Brzoza-Brzezina, 2005. "Lending booms in the new EU Member States - will euro adoption matter?," Working Paper Series 543, European Central Bank. [Downloadable!]
  15. Fugarolas Álvarez-Ude, Guadalupe & Hervés-Beloso, Carlos, 2005. "A unified differential information framework assessing that more information is preferred to less," MPRA Paper 612, University Library of Munich, Germany. [Downloadable!]
  16. Ladislav Wintr & Paolo Guarda & Abdelaziz Rouabah, 2005. "Estimating the natural interest rate for the euro area and Luxembourg," BCL working papers cahier_etude_15, Central Bank of Luxembourg. [Downloadable!]
  17. Roman Horvath, 2007. "The Time-Varying Policy Neutral Rate in Real Time: A Predictor for Future Inflation?," Working Papers 2007/4, Czech National Bank, Research Department. [Downloadable!]
  18. Mishra, SK, 2003. "Issues and problems in human resource development in the NER (India)," MPRA Paper 1828, University Library of Munich, Germany. [Downloadable!]
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