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The euro area natural interest rate – Estimation and importance for monetary policy

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This study presents estimates of the euro area natural interest rate for the last 50 years. The results are obtained using a more general version of the Holston et al. (2017) model adjusted for the pandemic period that incorporates the role of inflation expectations. The estimated natural interest rate shows a downward trend from around 3% in the early 1970s to levels around 0.5% in 2022. The real interest rate gap – defined as the difference between the observed interest rate and the natural interest rate – allows an assesment on the degree of monetary policy accommodation. The estimates obtained indicate an accommodative monetary policy after the start of the global financial crisis, in a progressive way until the recent sharp rise in interest rates. The communication of the level of the natural interest rate by central banks can be relevant to influence expectations of long-term interest rates.
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