Navigating by r*: safe or hazardous?

Keynote Lecture by Claudio Borio, Head of the BIS Monetary and Economic Department
at SUERF, Bocconi, OeNB workshop on "How to raise r*?".

BIS speech  | 
15 September 2021
PDF full text
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 |  20 pages

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.