R-star wars: the phantom menace
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The natural real rate of interest has been on a declining path for the past 30 years. I present a regime-switching analysis of the natural rate, which suggests that the current low levels are likely to persist in the near future. I identify a high global demand for safe assets as the most important factor in keeping the natural rate low. I conclude that the current low levels of the policy rate are generally appropriate, with some upside risk, and that forward guidance should be characterized by a flat policy rate path.
KeywordsNatural real interest rate Markov switching Monetary policy rules
JEL ClassificationC24 E47 E58
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