The Real Interest Rate Gap: Measurement and Application

Working paper no 6, 2002

Authors Christensen, Anders Møller
Subject International Economy; Monetary- and foreign-exchange policy; Monetary conditions; USA; EU; Other subjects; Monetary policy; Financial markets
Type Working paper
Year 2002
Published 7 October 2002
For empirical purposes it is suggested to approximate the real interest rate gap by a simple transformation of the difference between two nominal interest rates, the central bank's policy rate and the long-term interest rate. The latter contains information on inflationary expectations and expected real returns from other assets. The suggested measure is used for an empirical analysis of recent monetary policy in a few countries and some new, although preliminary interpretations are obtained, in particular concerning the US and Sweden. In addition, arguments are put forward to include the measure in the analyses under the first pillar of the ECB. The measure is readily available in real time.