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Real interest rates and the ECB's monetary policy stance

Author

Listed:
  • Marco Bernardini

    (Bank of Italy)

  • Lara D'Arrigo

    (Bank of Italy)

  • Alessandro Lin

    (Bank of Italy)

  • Andrea Tiseno

    (Bank of Italy)

Abstract

We present a new market-based measure of the short-term real interest rate in the euro area. Simple metrics based on the difference between 1-year Overnight Index Swap (OIS) and Inflation-Linked Swap (ILS) rates suffer from a timing mismatch stemming from the lagged indexation of ILS. Our measure addresses this issue by leveraging on Inflation Fixing Swaps (IFS), contracts linked to each of the next 24 releases of euro area inflation. Compared to the yearly maturity structure of ILS, the monthly maturities of IFS allow for a sharp time alignment of nominal interest rate and expected inflation, yielding a more accurate and reliable measure of the ex-ante short-term real interest rate as well of its expected evolution. We use this measure to provide a comprehensive analysis of the ECB's monetary policy stance during the post-pandemic era.

Suggested Citation

  • Marco Bernardini & Lara D'Arrigo & Alessandro Lin & Andrea Tiseno, 2024. "Real interest rates and the ECB's monetary policy stance," Questioni di Economia e Finanza (Occasional Papers) 857, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_857_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2024-0857/QEF_857_24.pdf
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    References listed on IDEAS

    as
    1. Bernardini, Marco & Lin, Alessandro, 2024. "Out of the ELB: Expected ECB policy rates and the Taylor rule," Economics Letters, Elsevier, vol. 235(C).
    2. Munch Grønlund, Asger & Jørgensen, Kasper & Schupp, Fabian, 2024. "The role of technical factors in euro area inflation-linked swap rates," Economic Bulletin Boxes, European Central Bank, vol. 3.
    3. Brand, Claus & Lisack, Noëmie & Mazelis, Falk, 2024. "Estimates of the natural interest rate for the euro area: an update," Economic Bulletin Boxes, European Central Bank, vol. 1.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    monetary policy stance; real interest rates; natural rate; inflation expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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