TAILIEUCHUNG - WORKING PAPER SERIES NO. 546 / NOVEMBER 2005: THE NATURAL REAL INTEREST RATE AND THE OUTPUT GAP IN THE EURO AREA A JOINT ESTIMATION

The need for a money market arises because receipts of economic units do not coincide with their expenditures. These units can hold money balances—that is, transactions balances in the form of currency, demand deposits, or NOW accounts—to insure that planned expenditures can be maintained independently of cash receipts. Holding these balances, however, involves a cost in the form of foregone interest. To minimize this cost, economic units usually seek to hold the minimum money balances required for day-to- day transactions. They supplement these balances with holdings of money market instruments that can be converted. | EUROPEAN CENTRAL BANK THE NATURAL REAL INTEREST RATE AND THE OUTPUT GAP IN THE EURO AREA A JOINT ESTIMATION by Julien Garnier and Bjorn-Roger Wilhelmsen 546 NOVEMBER 2005 WORKING PAPER SERIES EUROPEAN CENTRAL BANK WORKING PAPER SERIES NO. 546 I NOVEMBER 2005 THE NATURAL REAL INTEREST RATE AND THE OUTPUT GAP IN THE EURO AREA A JOINT ESTIMATION 1 by Julien Garnier2 and Bj0rn-Roger Wilhelmsen3 In 2005 all ECB publications will feature a motif taken from the 50 banknote. This paper can be downloaded without charge from http or from the Social Science Research Network electronic library at http abstract_id 836428. I Work on the project began while Julien Garnier was doing an internship and Bjorn-Roger Wilhelmsen was on secondment at the European Central Bank. All views expressed in the paper are only those of the authors and are not necessarily those of the European Central Bank ECB or the institutions to which the authors are are grateful to Siem Jan Koopman for very helpful suggestions and also thank P. Cour-Thimann V Curdia F. Drudi S. McCaw D. Rodriguez-Palenzuela R. Pilegaard H. Pill L. Stracca T. Laubach J. and the participants of the ECB workshop on natural interest rates on Februar 19th 2004. 2 European University institute and University of Parix X-Nanterre. e-mail 3 Central Bank of Norway Economics Department e-mai European Central Bank 2005 Address Kaiserstrasse 29 60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany Telephone 49 69 1344 0 Internet http Fax 49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Any reproduction publication and reprint in the form of a different publication whether printed or produced electronically in whole or in part is permitted only with the explicit written authorisation of the ECB or the author s . The views expressed in this paper do not .

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