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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 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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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:empiri:v:31:y:2004:i:2:p:185-204
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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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  4. Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
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  14. Giammarioli, Nicola & Valla, Natacha, 2003. "The natural real rate of interest in the euro area," Working Paper Series 0233, European Central Bank.
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