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Working Paper
The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds
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 ...
Working Paper
Measuring Inflation Anchoring and Uncertainty : A US and Euro Area Comparison
We use several US and euro-area surveys of professional forecasters to estimate a dynamic factor model of inflation featuring time-varying uncertainty. We obtain survey-consistent distributions of future inflation at any horizon, both in the US and the euro area. Equipped with this model, we propose a novel measure of the anchoring of inflation expectations that accounts for inflation uncertainty. Our results suggest that following the Great Recession, inflation anchoring improved in the US, while mild de-anchoring occurred in the euro-area. As of our sample end, both areas appear to be ...
Working Paper
German Inflation-Linked Bonds: Overpriced, Yet Undervalued
We document that German inflation-linked government bond yields contain a convenience or safety premium averaging 0.33 percent. Yet, the German Federal Finance Agency decided to cease all future issuance of these bonds in November 2023. We examine the market response to this announcement and find that neither the safety premia nor the trading conditions of these bonds have been negatively impacted. Hence, this bond market remains a rich source of information on real rates in the euro area in addition to offering investors a safe inflation-protected asset.
Journal Article
A Rising Star: The Natural Interest Rate in the Euro Area
The natural rate of interest, also known as r-star, is a key variable for analyzing fiscal and monetary policy. A novel method of measuring this rate for the euro area uses a yield curve model estimated directly on the prices of bonds that are indexed to euro-area inflation. Estimates suggest that the euro-area natural interest rate declined persistently in the two decades before the pandemic but has risen notably in recent years. Projections using this methodology suggest that the rate is likely to increase further, albeit more gradually.