The natural real rate of interest has been on a declining path for the past 30 years. I present a regime-switching analysis of the natural rate, which suggests that the current low levels are likely to persist in the near future. I identify a high global demand for safe assets as the most important factor in keeping the natural rate low. I conclude that the current low levels of the policy rate are generally appropriate, with some upside risk, and that forward guidance should be characterized by a flat policy rate path.
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This method is using ex-post inflation. Forward-looking measures, based on Federal Reserve Bank of Cleveland data on inflation expectations, are similar but more volatile.
For some analysis along this line, see Lagos (2010).
The inflation target is in terms of the annual change in the price index for personal consumption expenditures (PCE).
See Bullard (2016) for more details on the St. Louis Fed’s approach to characterizing the U.S. economic outlook.
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This article is an extended version of remarks delivered at the 34th Annual NABE Economic Policy Conference, Washington, DC, February 26, 2018. The author appreciates the assistance and comments provided by colleagues at the Federal Reserve Bank of St. Louis. Any opinions expressed here are the author’s own and do not necessarily reflect those of the Federal Open Market Committee.
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Bullard, J.B. R-star wars: the phantom menace. Bus Econ 53, 60–65 (2018). https://doi.org/10.1057/s11369-018-0077-1
- Natural real interest rate
- Markov switching
- Monetary policy rules