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The natural real interest rate and the output gap in the euro area: A joint estimation

  • Julien Garnier

    (European University Institute and University of Paris X-Nanterre)

  • Bjørn-Roger Wilhelmsen

    (Norges Bank (Central Bank of Norway))

The notion of a natural real rate of interest, due to Wicksell (1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output at its potential level and stationary inflation. Such a consept is of primary concern for monetary policy because it provides a benchmark for the monetary policy stance. This paper applies the method recently suggested by T. Laubach and J. C. Williams to jointly estimate the natural real interest rate and the output gap in the euro area using data from 1960. Our results suggest that the natural real rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and 1990s.

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Paper provided by Norges Bank in its series Working Paper with number 2005/14.

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Length: 27 pages
Date of creation: 06 Dec 2005
Date of revision:
Handle: RePEc:bno:worpap:2005_14
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  1. Cour-Thimann, Philippine & Pilegaard, Rasmus & Stracca, Livio, 2006. "The output gap and the real interest rate gap in the euro area, 1960-2003," Journal of Policy Modeling, Elsevier, vol. 28(7), pages 775-790, October.
  2. 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).
  3. 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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  16. Jens D J Larsen & Jack McKeown, 2004. "The informational content of empirical measures of real interest rate and output gaps for the United Kingdom," Bank of England working papers 224, Bank of England.
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