R-Star Wars - John Williams and Volker Wieland discuss the natural rate of interest

Many economists argue in their papers that the natural rate of interest, or r-star, has declined over the past decades. Based on this, central banks also refer to this decline while stating reasons for their low-interest rate policy. In two debates, John Williams, President of the San Francisco Fed, and Volker Wieland have discussed the issues of the neutral interest rate.

According to Williams, the decline of the GDP growth, the demographic trend, and higher premia on risky assets are reasons for the lower neutral interest rate. He recommends to adapt the Taylor rule to these circumstances. As a consequence for monetary policy, he considers a price level strategy instead of inflation targeting.

Wieland, on the other hand, draws the attention to the huge degree of imprecision and sensitivity while measuring r-star. Therefore, he strongly recommends that the neutral rate of interest should not be driving major monetary policy decisions.

The first debate between Williams and Wieland took place during the conference “The ECB and Its Watchers” in Frankfurt on 6 April. Sam Fleming of the Financial Times moderated the discussion. Find the video and the summary of the debate here (debate starts at 5:12)

The second debate was held at an event of the Stanford Institute of Economic Policy Research (SIEPR) und Hoover Institute in San Francisco on 6 May. John B. Taylor moderated the debate. The video is available here. In his blog "Economics One" Taylor shares his assessments of the debate.

Publications of Volker Wieland on the neutral interest rate