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


  • Jesús Cuaresma


  • Ernest Gnan


  • Doris Ritzberger-Gruenwald



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

Suggested Citation

  • Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, vol. 31(2), pages 185-204, June.
  • Handle: RePEc:kap:ecopln:v:31:y:2004:i:2:p:185-204 DOI: 10.1007/s10663-004-0914-5

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    References listed on IDEAS

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