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Estimating the natural interest rate for the euro area and Luxembourg

Listed author(s):
  • Ladislav Wintr

    ()

  • Paolo Guarda

    ()

  • Abdelaziz Rouabah

    ()

This paper estimates the natural real interest rate that is consistent with stable inflation and output at its potential for the euro area and Luxembourg. The natural interest rate provides a benchmark for assessing the monetary policy stance, as policy is contractionary when real interest rates rise above the natural rate and expansionary when real interest rates fall below this level. We follow Laubach and Williams (2003) in using a small backward-looking macroeconomic model to estimate the time-varying natural interest rate as an unobservable variable. For the euro area, our results suggest the natural interest rate has been fairly stable since 1970 and confirm its decline over the last decade. For Luxembourg, our estimate of the natural interest rate is much higher, reflecting higher potential growth. The results suggest that the single monetary policy may have had an expansionary impact in recent years, especially in Luxembourg.

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File URL: http://www.bcl.lu/fr/Recherche/publications/cahiers_etudes/15/BCLWP015.pdf
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Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 15.

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Length: 27 pages
Date of creation: Jun 2005
Handle: RePEc:bcl:bclwop:bclwp015
Contact details of provider: Web page: http://www.bcl.lu/

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  1. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, vol. 40(1), pages 15-32, January.
  2. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
  3. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
  4. Thomas Laubach, 2001. "Measuring The NAIRU: Evidence From Seven Economies," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 218-231, May.
  5. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-368, July.
  6. 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.
  7. Clark, Todd E. & Kozicki, Sharon, 2004. "Estimating equilibrium real interest rates in real-time," Discussion Paper Series 1: Economic Studies 2004,32, Deutsche Bundesbank, Research Centre.
  8. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Wiley Blackwell, vol. 2(1), pages 85-116, April.
  9. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
  10. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
  11. Mesonnier, Jean-Stephane & Renne, Jean-Paul, 2007. "A time-varying "natural" rate of interest for the euro area," European Economic Review, Elsevier, vol. 51(7), pages 1768-1784, October.
  12. John C. Williams, 2003. "The natural rate of interest," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct31.
  13. Jesus Crespo Cuaresma & Ernest Gnan & Doris Ritzberger-Grünwald, 2003. "Searching for the Natural Rate of Interest: a Euro-Area Perspective," Working Papers 84, Oesterreichische Nationalbank (Austrian Central Bank).
  14. Katharine S. Neiss and Edward Nelson, 2001. "The Real Interest Rate Gap as an Inflation Indicator," Computing in Economics and Finance 2001 145, Society for Computational Economics.
  15. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
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