R-star: A new approach to estimate the polar star of monetary policy

Peter Bofinger and Thomas Haas

No 106, W.E.P. - Würzburg Economic Papers from University of Würzburg, Department of Economics

Abstract: The necessary adjustments to prominent measures of the neutral rate of interest following the COVID pandemic sparked a wide-ranging debate on the measurement and usefulness of r-star. Due to high uncertainty about relevant determinants, trend patterns and the correct estimation method, we propose in this paper a simple alternative approach derived from a standard macro model. Starting from a loss function, neutral periods can be determined in which a neutral real interest rate is observable. Using these values, a medium-term trend for a neutral interest rate can be determined. An application to the USA shows that our simple calculation of a neutral interest rate delivers comparable results to existing studies. A Taylor rule based on our neutral interest rate also does a fairly good job of explaining US monetary policy over the past 60 years.

Keywords: Neutral rate of interest; equilibrium real interest rate; monetary policy rul (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:wuewep:106

DOI: 10.25972/OPUS-32739

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