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

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  • Bofinger, Peter
  • Haas, Thomas

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- to long-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.

Suggested Citation

  • Bofinger, Peter & Haas, Thomas, 2023. "R-Star: A new approach to estimate the polar star of monetary policy," CEPR Discussion Papers 18420, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18420
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    More about this item

    Keywords

    Neutral rate of interest;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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