The Four R-stars: From Interest Rates to Inflation and Back

Ricardo Reis

No 20071, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: R-star is a useful benchmark for the real interest rate. Sometimes, it refers to the steady-state equilibrium rate where savings equal investment (m), other times to the long-run value for the yield on safe government bonds (y), other times to the counterfactual return earned by inputs when the level of output is at potential (\rho), and some other times to the neutral monetary policy rate at which inflation is at its target value (i). This paper first documents the differing trends of these four R-stars in the quarter-century before the pandemic. Then, it proposes a general framework to make sense of their joint evolution, together with how they affect inflation. Looking ahead, if the steep rise in y and the slight fall in m observed since the pandemic until 2023 become new trends, the framework points to what will be the new challenges facing fiscal and monetary policy.

JEL-codes: E43 E52 E62 (search for similar items in EconPapers)
Date: 2025-03
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