ECB Economic Bulletin: R* Estimated at Similar to Pre-pandemic Levels

7 February 2024

By Isabel Teles – FRANKFURT (Econostream) – The natural interest rate for the euro area, r*, has been estimated to be similar to pre-pandemic levels, according to an economic bulletin pre-release published Wednesday by the European Central Bank.

‘...r* is estimated to have moved closer to pre-pandemic levels – albeit within a narrower range around zero – mainly owing to changes in cyclical measures’, the authors of the article said.

The estimates obtained from models since the second half of 2023 ranged from about -0.75pp to around 0.5pp, according to the authors.

Pandemic shocks could be associated with a temporary increase in the measures of r*, the authors said.

‘If higher r* were material and persisted beyond the post-pandemic inflationary episode, it would undercut the effects of the normalisation and tightening of monetary policy since the end of 2021. However, the normalisation of supply in recent years – as seen, for instance, in improvements in delivery times – would work in the opposite direction, reducing the required equilibrium increase in r*’, they said.

Model uncertainty made it complicated to measure r* and to use it as an indicator of monetary policy, especially due to the pandemic shocks, the authors said.

‘While cyclical measures of euro area r*have been edging higher, slow-moving estimates anchored to long-run economic trends are unlikely to have risen’, they said. ‘The estimates vary widely, reflecting a high degree of model uncertainty and differences in model-specific inflation stabilisation properties.’