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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1067:
Measuring Expected Inflation and the Ex-Ante Real Interest Rate in the Euro Area Using Structural Vector Autoregressions

Jan Gottschalk

Abstract: In this paper, the structural vector autoregression methodology is used to decompose the euro area nominal short-term interest rate into an expected inflation and an ex-ante real interest rate component. The latter may be a useful indicator of the monetary policy stance of the ECB. To this end, a vector autoregression model comprised of the differenced interest rate series and the stationary component of the real interest rate is estimated and shocks to expected inflation and the ex-ante real rate are identified using the long-run restriction that only shocks to expected inflation have long-run effects on the nominal interest rate.

Keywords: Monetary policy stance, Inflation expectations, Structural vector autoregressive model; (follow links to similar papers)

JEL-Codes: C32; E52; (follow links to similar papers)

18 pages, July 2001

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