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R-star, Uncertainty, and Monetary Policy

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  • Kevin J. Lansing

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.

Suggested Citation

  • Kevin J. Lansing, 2017. "R-star, Uncertainty, and Monetary Policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfel:00131
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    References listed on IDEAS

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