Paper by Prof. Bofinger and Thomas Haas: A new approach to estimate the polar star of monetary policy
09/04/2023In the midst of the current debate regarding adjustments in determining the natural rate of interest, Prof. Bofinger and Thomas Haas propose a simpler method. Their approach yields comparable results to existing studies and provides some explanation for the American monetary policy over the last 60 years.
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.
R-Star: A new approach to estimate the polar star of monetary policy
