Working Paper Series no. 157: The Reliability of Macroeconomic Forecasts based on Real Interest Rate Gap Estimates in Real Time: an Assessment for the Euro Area

Abstract

The real interest rate gap or IRG -the gap between the short term real interest rate and its "natural" level-, is a theoretical concept that has attracted much attention in central banks in recent years. This paper aims at clarifying its practical relevance for monetary policy in real time. For this purpose, it provides an empirical assessment of the usefulness of various univariate and multivariate estimates of the real IRG for predicting inflation, real activity and real credit growth in the euro area. The results suggest that the reliability of such indicators for real time policy guidance remains limited.

Jean-Stéphane Mésonnier
October 2006

Classification JEL : C53, E37, E52 .

Keywords : natural rate of interest, monetary policy, forecasting.