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

Author

Listed:
  • Jesús Cuaresma

    ()

  • Ernest Gnan

    ()

  • Doris Ritzberger-Gruenwald

    ()

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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Suggested Citation

  • Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 185-204, June.
  • Handle: RePEc:kap:empiri: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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    1. Hans Christiansen & Charles Pigott, 1997. "Long-Term Interest Rates in Globalised Markets," OECD Economics Department Working Papers 175, OECD Publishing.
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    More about this item

    Keywords

    Natural rate of interest; unobserved components models; monetary policy; Taylor rule;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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