Navigating by r*: safe or hazardous?

Claudio Borio

No 982, BIS Working Papers from Bank for International Settlements

Abstract: The concept of the natural rate of interest, or r*, has risen to prominence in monetary policy following the Great Financial Crisis. No doubt a key reason for the concept's newfound prominence has been the further decline of real and nominal interest rates to new lows, which has further constrained monetary policy's room for manoeuvre. This lecture explores the extent to which the concept can be a useful guide to policy. It concludes that, depending on how it is employed, the concept has the potential of leading policy astray and of complicating the task of regaining the needed policy headroom. If so, within a credible policy regime, there is a premium on flexibility in the pursuit of tightly defined inflation targets – on tolerance for transitory, but possibly persistent, shortfalls of inflation from target.

Keywords: natural interest rate; central banking; monetary policy (search for similar items in EconPapers)
JEL-codes: E40 E43 E52 E58 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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