How Low Can You Go: Monetary Policy Constraints And Options For The Next Recession


Economic theory suggests that the neutral real rate of interest (r*) is determined, in part, by the economy’s trend growth rate. Trend growth, in turn, is a function of demographic trends (how many workers you have producing widgets) and productivity trends (how many widgets those workers produce in an hour). For a more detailed exposition see the appendix to this note or “The Future Fortunes of R-star: Are They Really Rising?” by John Williams (2018).

“Monetary Policy in a Low Interest Rate World”. Michael Kiley and John Roberts (2017).

What central bankers actually care about are real interest rates. Thus, they want to ensure that both nominal long-term rates come down AND that inflationary expectations remain anchored.

See, for example, here: https://www.federalreserve.gov/monetarypolicy/files/FOMC20050401memo01.pdf

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