In the eye of the beholder

Remarks by Mr Claudio Borio, Head of the Monetary and Economic Department, at the ECB Forum on Central Banking on "Monetary policy in an era of transformation", Sintra, 1-3 July 2024.

Is it useful, as is commonly done, to divine where real (inflation-adjusted) interest rates will go based on views about the evolution of the natural rate of interest, or r-star? This presentation argues that it is not, and that for much the same reasons r-star is not a helpful compass for monetary policy. In fact, a more useful starting point is to focus on who sets real interest rates at all points in time – the central bank – and what it responds to. Monetary policy may well hold the key. R-star, like beauty, is in the eye of the beholder.