The equilibrium real interest rate corresponds to the real interest rate when GDP corresponds the potential growth and the price level remains constant. If a central bank follows a positive inflation target, this would correspond with the interest rate where inflation coincides with target rate in the long term. As a sum of the equilibrium real interest rate and the inflation target, the nominal interest rate reaches its steady state level and is an important reference mark in monetary policy, taken into account in the Taylor Rule, the most important interest-rate rule in monetary policy.
Refering to an earlier paper with Robert C.M. Beyer, Wieland demonstrates that estimates of equilibrium real interest rates entail a high degree of uncertainty. Furthermore, those are mostly medium-term instead of long-term estimates. Therefore, Wieland argues that equilibrium real interest rates should not have a key role to play in monetary and fiscal policy decisions.
However, if used nevertheless, a consistent application together with associated output estimates call for a tightening of the policy stance in the United States and the euro area, he concludes.
Volker Wieland
"Negativzinsen: Geldpolitik oder Gleichgewichtszins?"
(Negative Interest Rates: Monetary Policy or Equilibrium Real Interest Rate?)
In: Monetary Economic Issues Today. Festschrift in honour of Ernst Baltensperger
Swiss National Bank, Orell Füssli, 2017, pp.289-302