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Searching for the natural rate of interest: a euro area perspective

  • Jesús Cuaresma
  • Ernest Gnan
  • Doris Ritzberger-Gruenwald
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    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 is proposed in order to adjust the risk premia in the interest rate data prior to 1999. 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; in 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 an approximately 1.2%increase in short-term interest rates. Copyright Kluwer Academic Publishers 2004

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    File URL: http://hdl.handle.net/10.1007/s10663-004-0914-5
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    Article provided by Springer in its journal Empirica.

    Volume (Year): 31 (2004)
    Issue (Month): 2 (June)
    Pages: 185-204

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    Handle: RePEc:kap:ecopln:v:31:y:2004:i:2:p:185-204
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    1. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
    2. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
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    4. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
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    6. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
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    8. Harvey,Andrew C., 1990. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521321969.
    9. Hans Christiansen & Charles Pigott, 1997. "Long-Term Interest Rates in Globalised Markets," OECD Economics Department Working Papers 175, OECD Publishing.
    10. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
    11. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
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    13. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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