Equilibrium real interest rates and the financial cycle: Empirical evidence for Euro area member countries |
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| Institution: | 1. University of Duisburg-Essen, Centre for European Policy Studies, Brussels, King''s College, London, & Institute for the Study of Labor, Bonn, Germany;2. THM Business School, Giessen, Germany;1. WHU - Otto Beisheim School of Management, Burgplatz 2, 56179, Vallendar, Germany;2. EBS Business School, Burgstraße 5, 65375, Oestrich-Winkel, Germany;1. CNRS, IÉSEG School of Management, Univ. Lille, UMR 9221 - LEM, 3 Rue de la Digue, F-59000, Lille, France;2. University of Illinois at Chicago, IÉSEG School of Management, 757 Sphpi, M/c 923, 1603 W. Taylor St, Chicago, IL 60612, USA;3. IÉSEG School of Management, Univ. Lille, UMR 9221 - LEM, 3 Rue de la Digue, F-59000, Lille, France;1. Department of Business Administration, Athens University of Economics and Business, 76 Patission Street, GR-10434, Athens, Greece;2. IPAG Business School, 184 Boulevard Saint-Germain, FR-75006, Paris, France;3. Centre for Planning and Economic Research, 11 Amerikis Street, GR-10672, Athens, Greece;1. Department of Business and Economic Studies, University of Naples - Parthenope, Italy;2. Department of Economics, University of Patras, Rio, 26504, Patras, Greece;3. Visiting Professor, University of Naples, Parthenope,Italy |
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| Abstract: | We estimate the equilibrium real interest rate for nine Euro area member countries and the Euro area as a whole using quarterly data from 1995 to 2015. We expand the standard model of estimating real equilibrium interest rates to incorporate the financial cycle for the private sector. We show that adding the financial cycle indeed alters the equilibrium real interest rate estimates and, in line with previous studies, that there is a fall in the equilibrium real interest rate over time. Our results indicate that in most member countries the real rate is lower than its equilibrium level. Hence, they should not worry about secular stagnation now. This is because secular stagnation is likely to occur when real interest rates are higher than their equilibrium levels. This result can serve as a starting point for further research in this field, e.g. by adding public sector financial cycles or disentangling the roles of households, corporations and the government. |
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| Keywords: | Equilibrium real interest rate Euro area Financial cycle Heterogeneity Monetary policy Secular stagnation E43 F45 C32 |
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