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Journal Article
The Natural Rate of Interest in Taylor Rules
The Taylor rule suggests that the federal funds rate should be adjusted when inflation deviates from the Fed?s inflation target or when output deviates from the Fed?s estimate of potential output. Typical formulations of the rule assume that the level of the inflation-adjusted federal funds rate that is expected to prevail in the long run, sometimes thought of as the ?natural? rate of interest, is constant over time. Since this assumption is likely incorrect, we show how the Taylor rule can account for a variable natural rate by incorporating long-term productivity growth. We also show that ...