The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds

2024-08 | March 8, 2024

The so-called equilibrium or natural rate of interest, widely known as r*t, is a key variable used to judge the stance of monetary policy. We offer a novel euro-area estimate based on a dynamic term structure model estimated directly on the prices of bonds with cash flows indexed to the euro-area harmonized index of consumer prices with adjustments for bond-specific risk and real term premia. Despite a recent increase, our estimate indicates that the natural rate in the euro area has fallen about 2 percentage points on net since 2002 and remains negative at the end of our sample. We also devise a related measure of the stance of monetary policy, which suggests that monetary policy in the euro area was not accommodative at the height of the COVID-19 pandemic.

Article Citation

Christensen, Jens H. E., and Sarah Mouabbi. 2024. “The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds,” Federal Reserve Bank of San Francisco Working Paper 2024-08. Available at https://doi.org/10.24148/wp2024-08

About the Author
Jens Christensen
Jens Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Jens Christensen