Template-Type: ReDIF-Paper 1.0
Author-Name: Claudio Borio
Author-X-Name-First: Claudio 
Author-X-Name-Last: Borio
Title: Navigating by r*: safe or hazardous?
Abstract: The concept of the natural rate of interest, or r*, has risen to prominence in monetary policy following the Great Financial Crisis. No doubt a key reason for the concept's newfound prominence has been the further decline of real and nominal interest rates to new lows, which has further constrained monetary policy's room for manoeuvre. This lecture explores the extent to which the concept can be a useful guide to policy. It concludes that, depending on how it is employed, the concept has the potential of leading policy astray and of complicating the task of regaining the needed policy headroom. If so, within a credible policy regime, there is a premium on flexibility in the pursuit of tightly defined inflation targets – on tolerance for transitory, but possibly persistent, shortfalls of inflation from target.
Length: 26 pages
Creation-Date: 2021-11
File-URL: https://www.bis.org/publ/work982.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work982.htm
File-Format: text/html
Number: 982
Keywords: natural interest rate, central banking, monetary policy
Classification-JEL: E40, E43, E52, E58
Handle: RePEc:bis:biswps:982