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A Rising Star: The Natural Interest Rate in the Euro Area

Author

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  • Jens H. E. Christensen
  • Sarah Mouabbi

Abstract

The natural rate of interest, also known as r-star, is a key variable for analyzing fiscal and monetary policy. A novel method of measuring this rate for the euro area uses a yield curve model estimated directly on the prices of bonds that are indexed to euro-area inflation. Estimates suggest that the euro-area natural interest rate declined persistently in the two decades before the pandemic but has risen notably in recent years. Projections using this methodology suggest that the rate is likely to increase further, albeit more gradually.

Suggested Citation

  • Jens H. E. Christensen & Sarah Mouabbi, 2025. "A Rising Star: The Natural Interest Rate in the Euro Area," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2025(11), pages 1-6, May.
    • Handle: RePEc:fip:fedfel:99956
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    References listed on IDEAS

    as
    1. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    2. Davis, Josh & Fuenzalida, Cristian & Huetsch, Leon & Mills, Benjamin & Taylor, Alan M., 2024. "Global natural rates in the long run: Postwar macro trends and the market-implied r∗ in 10 advanced economies," Journal of International Economics, Elsevier, vol. 149(C).
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