The output gap and the real interest rate gap in the euro area, 1960–2003

The forecasting power of real interest rate gaps: an assessment for the Euro area

“…In contrast, IRG estimated on the basis of multivariate UC models exhibit zero to slightly negative correlations with future inflation. Nevertheless, the correlation coefficients for the (one-sided) HJ and MR IRG remain contained (with a maximum absolute value of about 0.1) and stand clearly below the levels displayed in other studies relative to the euro area, notably Giammarioli and Valla (2003), and Garnier and Wilhelmsen (2005) and, but to a lesser extent, Crespo-Cuaresma et al (2004). Three main reasons may account for the higher negative correlations between inflation and IRG estimates found in the first two of these papers.…”

“…2 See Crespo-Cuaresma, Gnan and Ritzberger-Grünewald (2005) for a survey of this empirical literature. In this paper, I aim to test for the practical significance of empirical real IRG estimates for the euro area in a more systematic way.…”

The Output Euler Equation and Real Interest Rate Regimes

“…It is worth mentioning that the chosen specification for r * t is purely statistical. This is similar in spirit to the empirical specifications of Larsen and McKeown (2004), Basdevant et al (2004), andCour-Thimann et al (2006). Another approach that is more in line with theory is to let r * t vary with real fundamentals, such as the determinants of trend GDP growth [Giammarioli and Valla (2003), Laubach and Williams (2003), Neiss and Nelson (2003)].…”

The Natural Real Interest Rate and the Output Gap in the Euro Area: A Joint Estimation

“…On the contrary, other papers conclude that fluctuations in the natural real interest rate explain most of the variation in the real interest rate (Basdevant et al, 2004;Cuaresma et al, 2004;Cour-Thimann et al, 2004;Larsen and McKeown, 2002). The papers consistent with this view typically make use of the Kalman filter or other filtering techniques to split the actual real rate into a trend (the natural real rate) and a cyclical component (the real rate gap).…”

“…The third step is dedicated to finding a median unbiased estimate of the variance of potential output growth, σ 2 5 . 4 For this purpose, we use the estimate of y * t from the previous step in order to run the median unbiased technique of Stock & Watson (1998). The procedure works as follows: 1) Regress for every date t the potential output growth 5 on a constant and a dummy with a break at time t. 2) Compute the t-ratios corresponding to the coefficients of the dummies.…”