Blog Post

Taylor-rule interest rates for euro area countries: diversity remains

Despite the very low headline (0.5%) and core (0.8%) inflation figures for March 2014, the Taylor-rule recommendation for the euro area has in fact slightly increased from the last quarter of 2013 to the first quarter of 2014.

By: Date: April 3, 2014 Topic: European Macroeconomics & Governance

Last September we wrote a blog post with Silvia Merler on Taylor-rule interest rate recommendations for euro area countries (see this post for explanation and interpretation of the results). Here is the update.

Not much has changed for the euro area as a whole (Figure 1, Panel A). The recommendation for the euro area is slightly lower in 2014Q1 than it was in 2013Q3. However, despite the very low headline (0.5%) and core (0.8%) inflation figures for March 2014, the Taylor-rule recommendation for the euro area has in fact slightly increased from the last quarter of 2013 to the first quarter of 2014. The reason is that average core inflation during the quarter was slight higher in 2014Q1 (0.87%) than in 2013Q4 (0.80%) and the gap between actual unemployment and the NAIRU (non-accelerating rate of unemployment) slightly narrowed, because unemployment remained the same (11.9% on a seasonally adjusted basis between October 2013 – February 2014), while the NAIRU increased a bit.

But diversity among the first 12 members of the euro area remained (Panels B, C and D of Figure 1). In Italy and the Netherlands there was a major decline in the Taylor-rule recommendation, due to a drop in core inflation and an increase in unemployment (Figure 2). In 2014Q1, the Taylor-rule suggests negative interest rates for five of the first twelve members of the euro area. Such a huge diversity makes the job of the European Central Bank extremely complicated, as we discussed in our blog post with Silvia last year.

Figure 1: Taylor-rule recommendations for the central bank interest rate (percent per year), 1999Q1-2014Q1

Notes: Taylor-rule target = 1 + 1.5 x Inflation – 1 x Unemployment gap. Similarly to Mechio (2011), we use core inflation (all items HICP excluding volatile food and energy prices; change relative to the same quarter of the previous year) and the deviation of the actual unemployment rate from the estimated non-accelerating inflation rate of unemployment (NAIRU), as estimated by the OECD. MRO = Main refinancing operations. The 2014Q1 recommendations are based on January-March 2013 core inflation rate for the euro area. For the 12 countries the March core inflation is not available: we assumed that it declined from February to March by as much as in the euro area aggregate (ie by 0.2 percentage points) and then calculated the average for January-March. The unemployment rate is available for January and February for most countries and we used their average for 2014Q1.

Figure 2: Core inflation, the unemployment rate and the estimated NAIRU (non-accelerating inflation rate of unemployment), percent

Note: the OECD’s NAIRU (non-accelerating inflation rate of unemployment) estimate is available at the annual frequency. We converted it to quarterly frequency by using the Hodrick-Prescott filter, which assumes smooth changes for the filtered series. For this filter, we used a rather low smoothing parameter, ie 10, in order to filter out only the impact of frequency conversion, but to keep tendencies. See, for example, the results of this smoothing for the euro area in Figure 3.

Figure 3: OECD’s annual estimate for the NAIRU and our approximation for the quarterly frequency, 1998-2015

Note: see the notes to Figure 2. The annual data is indicated by the blue line, which has the same value in each quarter of the year. The red line is our “quarterlised” estimate.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF More on this topic More by this author
 

Policy Contribution

Why has COVID-19 hit different European Union economies so differently?

All European Union countries are undergoing severe output losses as a consequence of COVID-19, but some have been hurt more than others. Factors potentially influencing the degree of economic contraction include the severity of lockdown measures, the structure of national economies, public indebtedness, and the quality of governance in different countries. With the exception of public indebtedness, we find all these factors are significant to varying degrees.

By: André Sapir Topic: European Macroeconomics & Governance Date: September 22, 2020
Read about event More on this topic
 

Upcoming Event

Sep
28
15:00

From playing field to player: Europe’s strategic autonomy as our generation’s goal

At this online event Charles Michel will speak the importance of Europe's strategic autonomy.

Speakers: Charles Michel and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author
 

Blog Post

Unpacking President von der Leyen’s new climate plan

European Commission President Ursula von der Leyen has set a new destination for EU climate policy: a 55% emissions reduction by 2030. This is a good and necessary step on the way to climate neutrality by 2050, but getting there will not be easy, and Europe should prepare for a bumpy road ahead.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: September 16, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

The State of the Union going forward

In the first Sound of Economics Live episode after summer we look at the State of the Union address delivered by Ursula von der Leyen.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 16, 2020
Read about event
 

Past Event

Past Event

The Sound of Economics Live: The State of the Union going forward

In the first Sound of Economics Live episode after summer we look at the State of the Union address delivered by Ursula von der Leyen.

Speakers: Giuseppe Porcaro, André Sapir, Guntram B. Wolff and Alicia García-Herrero Topic: Energy & Climate, European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 16, 2020
Read article More on this topic More by this author
 

Opinion

Without good governance, the EU borrowing mechanism to boost the recovery could fail

The European Union recovery fund could greatly increase the stability of the bloc and its monetary union. But the fund needs clearer objectives, sustainable growth criteria and close monitoring so that spending achieves its goals and is free of corruption. In finalising the fund, the EU should take the time to design a strong governance mechanism.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 15, 2020
Read article Download PDF More on this topic
 

Policy Contribution

Financing the European Union: New Context, New Responses

With the European Union for the first time taking on debt to help finance the economic recovery from the coronavirus, new resources are needed to fund the EU budget. Various ideas have been floated – including a digital tax and a financial transactions tax – but the most appropriate new resource would be revenues from the EU emissions trading system, which could provide enough funding to repay the EU's coronavirus borrowing.

By: Clemens Fuest and Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 11, 2020
Read article More by this author
 

Podcast

Podcast

For a better, more sovereign Europe

Keynote address by the German Federal Minister of Finance Olaf Scholz at Bruegel Annual Meetings, 3 September 2020

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: September 9, 2020
Read article More by this author
 

Parliamentary Testimony

Employment and COVID-19

Testimony before the Economic Affairs Committee at the House of Lords, British Parliament on Employment and COVID-19.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation, Testimonies Date: September 9, 2020
Read about event
 

Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 3

Third day of Bruegel Annual Meetings.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 3, 2020
Read about event
 

Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 2

Second day of Bruegel Annual Meetings.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 2, 2020
Read about event
 

Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 1

The Annual Meetings are Bruegel's flagship event which gathers high-level speakers to discuss the economic topics that affect Europe and the world.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 1, 2020
Load more posts