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National natural rates of interest and the single monetary policy in the Euro Area

Author

Listed:
  • S. Fries
  • J.-S. Mésonnier
  • S. Mouabbi
  • J.-P. Renne

Abstract

Using a semi-structural approach, we jointly estimate time-varying national natural real rates of interest for the largest four economies of the Euro area over 1999-2016 and discuss the associated challenges for the single monetary policy. We find evidence of an increased dispersion of real equilibrium rates across major Euro area economies during the Euro area sovereign debt crisis. This dispersion translated into significantly diverging national real interest rate gaps, a synthetic metrics of the perceived monetary policy stance, between core and Southern countries. Real interest rate gaps have nonetheless converged towards zero in all four economies as of 2014, suggesting that it took the acceleration of unconventional policies since mid-2013 to eventually restore the conditions for a really common monetary policy in the Euro area.

Suggested Citation

  • S. Fries & J.-S. Mésonnier & S. Mouabbi & J.-P. Renne, 2016. "National natural rates of interest and the single monetary policy in the Euro Area," Working papers 611, Banque de France.
  • Handle: RePEc:bfr:banfra:611
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    References listed on IDEAS

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    2. 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.
    3. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters,in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
    4. Jeremy Rudd & Karl Whelan, 2007. "Modeling Inflation Dynamics: A Critical Review of Recent Research," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 155-170, February.
    5. Rachel, Lukasz & Smith, Thomas, 2015. "Secular drivers of the global real interest rate," Bank of England working papers 571, Bank of England.
    6. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-188, March.
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    Citations

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    Cited by:

    1. Rasa Stasiukynaite, 2017. "Understanding Monetary Policy Stance," Bank of Lithuania Occasional Paper Series 14, Bank of Lithuania.
    2. M. Marx & B. Mojon & F. Velde, 2017. "Why Have Interest Rates Fallen far Below the Return on Capital," Working papers 630, Banque de France.
    3. Mariarosaria Comunale & Jonas Striaukas, 2017. "Unconventional monetary policy: interest rates and low inflation: A review of literature and methods," CAMA Working Papers 2017-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. repec:nbb:ecrart:y:2017:m:september:i:ii:p:69-86 is not listed on IDEAS
    5. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.
    6. Stefano Neri & Andrea Gerali, 2017. "Natural rates across the Atlantic," Temi di discussione (Economic working papers) 1140, Bank of Italy, Economic Research and International Relations Area.
    7. Francois Velde & Benoït Mojon & Magali Marx, 2016. "Why are real interest rates so low?," 2016 Meeting Papers 1581, Society for Economic Dynamics.

    More about this item

    Keywords

    Euro area countries; natural rate of interest; common monetary policy; fragmentation;

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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