For Volker Wieland equilibrium interest rates indicate tighter monetary policy (VoxEU)

According to ECB President Draghi, the low interest rates in the euro area are partly a consequence of the low equilibrium interest rate. Henrike Michaelis and Volker Wieland of the German Council of Economic Experts demonstrate that the ECB should already have reacted by adapting monetary policy if the equilibrium interest rates were taken into account consistently.


Michaelis and Wieland  point out the risks of relying on these estimates as key determinants of the monetary policy stance. They argue that equilibrium interest rates are extremely uncertain and sensitive to technical assumptions. If used nevertheless, the consistent application together with the associated output gap would call for tightening the policy stance.

Based on the consistent use of the medium-run equilibrium interest rate and output gap estimates Michaelis and Wieland find that “the Taylor rule prescriptions start moving higher than the MRO rate at the end of 2014”. In view of the current course of monetary policy, they conclude that “ECB policy has become much more expansionary relative to the prescriptions of a version of the Taylor rule that responds to euro area inflation, output gap and a reduction in the medium-run R-Star”.

Henrike Michaelis and Volker Wieland
Vox EU
"R-Star and the Draghi rules"


see also:
Henrike Michaelis and Volker Wieland
"R-Star and the Yellen rules"