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Discussion Paper
The Post-Pandemic r*
The debate about the natural rate of interest, or r*, sometimes overlooks the point that there is an entire term structure of r* measures, with short-run estimates capturing current economic conditions and long-run estimates capturing more secular factors. The whole term structure of r* matters for policy: shorter run measures are relevant for gauging how restrictive or expansionary current policy is, while longer run measures are relevant when assessing terminal rates. This two-post series covers the evolution of both in the aftermath of the pandemic, with today’s post focusing especially ...
Discussion Paper
The Evolution of Short-Run r* after the Pandemic
This post discusses the evolution of the short-run natural rate of interest, or short-run r*, over the past year and a half according to the New York Fed DSGE model, and the implications of this evolution for inflation and output projections. We show that, from the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. One implication of these findings is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively ...