A note on the synchronisation of the natural rates of interest in Germany and the Euro Area

The European Central Bank (ECB) strives to maintain inflation at a 2% target rate, yet the Euro area's diverse economies pose challenges to achieving this goal with a single nominal interest rate. Effective monetary policy transmission hinges on synchronizing the Natural Rate of Interest (NRI) across constituent economies. This note investigates NRI synchronization between Germany, the largest Euro area economy, and the entire Euro area. Utilizing Bayesian estimation of the Holston et al. (2017) model, we find robust synchronization between Germany's NRI and that of the entire Euro area, even amid level differences, supporting effective monetary policy coordination.