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Journal Article
The Asymmetric Costs of Misperceiving R-star

The natural rate of interest, or r-star, is used to evaluate whether monetary policy is restrictive or supportive of economic activity. However, this benchmark rate can only be estimated, and policymakers’ misperceptions of the level of the natural rate can carry substantial economic costs in terms of unemployment and inflation. A scenario using mistaken perceptions shows that the costs of overestimating the natural rate are greater than the cost of underestimating it if policy space is limited by the effective lower bound on the nominal federal funds rate.
FRBSF Economic Letter , Volume 2021 , Issue 01 , Pages 01-05

Discussion Paper
The Post-Pandemic r*

The debate about the natural rate of interest, or r*, sometimes overlooks the point that there is an entire term structure of r* measures, with short-run estimates capturing current economic conditions and long-run estimates capturing more secular factors. The whole term structure of r* matters for policy: shorter run measures are relevant for gauging how restrictive or expansionary current policy is, while longer run measures are relevant when assessing terminal rates. This two-post series covers the evolution of both in the aftermath of the pandemic, with today’s post focusing especially ...
Liberty Street Economics , Paper 20230809

Discussion Paper
The Evolution of Short-Run r* after the Pandemic

This post discusses the evolution of the short-run natural rate of interest, or short-run r*, over the past year and a half according to the New York Fed DSGE model, and the implications of this evolution for inflation and output projections. We show that, from the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. One implication of these findings is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively ...
Liberty Street Economics , Paper 20230810

Measuring the Natural Rate of Interest: Past, Present, and Future

Remarks at the Thomas Laubach Research Conference, Board of Governors of the Federal Reserve System, Washington, DC.

Working Paper
The Rising Cost of Climate Change: Evidence from the Bond Market

The level of the social discount rate (SDR) is a crucial factor for evaluating the costs ofclimate change. We demonstrate that the equilibrium or steady-state real interest rate isthe fundamental anchor for market-based SDRs. Much recent research has pointed to adecrease in the equilibrium real interest rate since the 1990s. Using new estimates of thisdecline, we document a pronounced downward shift in the entire term structure of SDRsin recent decades. This lower new normal for interest rates and SDRs has substantiallyboosted the estimated economic loss from climate change and the social ...
Working Paper Series , Paper 2020-25

Living Life Near the ZLB

Remarks at 2019 Annual Meeting of the Central Bank Research Association (CEBRA), New York City.
Speech , Paper 327

When the Facts Change…: remarks at the 9th High-Level Conference on the International Monetary System, Zürich, Switzerland

Remarks at the 9th High-Level Conference on the International Monetary System, Zrich, Switzerland.
Speech , Paper 320

The Longer-Run Framework: A Look Ahead

Remarks at the Hoover Institution Monetary Policy Virtual Series: The Road Ahead for Central Banks (delivered via videoconference).

Inflation Targeting: Securing the Anchor

Remarks at The Future of Inflation Targeting, Bank of England, London, U.K.

Working Paper
Accounting for Low Long-Term Interest Rates: Evidence from Canada

In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term ...
Working Paper Series , Paper 2020-35


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