IDEAS home Printed from https://ideas.repec.org/p/bog/wpaper/366.html

The econometrics of the euro-area natural rate of interest

Author

Listed:
  • Dimitrios P. Louzis

    (Bank of Greece)

Abstract

The natural rate of interest (r*) plays a central role in monetary policy analysis, but its estimation is inherently model dependent. This paper studies how alternative econometric specifications affect the estimates of r* in the euro-area. We propose a Hybrid Common Trend Vector Autoregression that incorporates a large information set, stochastic volatility, and fat-tailed innovations. Using euro-area data spanning the last 25 years, we find that these features materially improve inference, reducing the width of 95\% credible intervals for r* by as much as 100 basis points relative to conventional specifications. Our results point to a persistent decline in the natural rate between 2000 and 2020, followed by a moderate post-pandemic recovery. The decomposition of r* identifies the trend of labor productivity growth as the dominant driver of its long-run movements. The findings suggest that uncertainty surrounding r* is partly econometric in nature and can be reduced through richer empirical specifications.

Suggested Citation

  • Dimitrios P. Louzis, 2026. "The econometrics of the euro-area natural rate of interest," Working Papers 366, Bank of Greece.
    • Handle: RePEc:bog:wpaper:366
    DOI: 10.52903/wp2026366
    as

    Download full text from publisher

    File URL: https://doi.org/10.52903/wp2026366
    File Function: Full Text
    Download Restriction: no
    File URL: https://libkey.io/10.52903/wp2026366?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    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
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bog:wpaper:366. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anastasios Rizos (email available below). General contact details of provider: https://edirc.repec.org/data/boggvgr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.