Working Paper

Monetary Policy and The Medium-Run Natural Rate

Abstract: The natural rate of interest is an elusive concept in theory and practice. However, it is essential for central banks’ calibration of the policy rate. Model consistent measures are often too extreme to be used in practice. On the other hand, empirical measures lack the full backing of theory to make them proper benchmarks. This paper proposes a medium-run measure of the natural rate that averages out some excessive fluctuations, while retaining enough connection to economic theory to make it optimal under certain circumstances. The discussion also provides a framework on how to evaluate and meaningfully address concerns by policymakers regarding the natural rate. The results suggest that a medium-run measure that concentrates on natural rate fluctuations in the range of two to five years ahead can be reasonable empirically and theoretically.

JEL Classification: C32; E43; E52; E58;

https://doi.org/10.24148/wp2025-24

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2025-10-16

Number: 2025-24