R-star, Uncertainty, and Monetary Policy

Kevin Lansing

FRBSF Economic Letter, 2017

Abstract: Investors? demand for safe assets tends to increase when there?s more uncertainty, as in recessions. Consistent with this idea, short-term movements in the natural rate of interest, or r-star, are negatively correlated with an index of macroeconomic uncertainty. This relationship may be relevant for assessing monetary policy. An estimated policy rule that incorporates both r-star and the uncertainty index can largely reproduce the path of the federal funds rate since 1988, except during periods when policy was constrained by the zero lower bound.

Date: 2017
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