Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264676 
Year of Publication: 
2003
Series/Report no.: 
Working Paper No. 84
Publisher: 
Oesterreichische Nationalbank (OeNB), Vienna
Abstract: 
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.
Subjects: 
Natural rate of interest
unobserved components models
monetary policy
Taylor rule
JEL: 
E43
E52
C32
Document Type: 
Working Paper

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