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All central bankers care about a rarely mentioned indicator.

All central bankers care about a rarely mentioned indicator.

R-Star (real neutral interest rate) is a term economists use to refer to the interest rate at which the economy remains in equilibrium in the long run. If the real interest rate is above this value, monetary policy will constrain the economy; if it is below, it will encourage it.

According to Williams, while some economists believe that the economic changes following the coronavirus led to the rise of R-Star, he himself is skeptical.

“While the value of R-Star is always highly uncertain, the case for significant growth in R-Star has yet to meet two important tests,” Williams said at the ECB conference in Sintra, Portugal.

Williams also noted that “any rise to R-Star must overcome the forces that have held it down for decades.” Among those forces, he pointed to global demographic and productivity growth trends that have remained similar to those seen pre-pandemic.

Williams stressed that while the 1000 can be an important long-term indicator, it should not be relied upon excessively when making short-term monetary policy decisions.

The central bank governor did not explain how he currently views monetary policy and economic expectations.

Source: Reuters

Cover image source: Portfolio

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