Former Fed chair Janet Yellen and ECB president Mario Draghi have referred to the decline in estimates of time varying medium-run equilibrium real interest rates as an important argument for keeping policy rates near zero interest-rate levels. In his analysis, Volker Wieland demonstrates that these estimates are highly imprecise and unstable.
He finds that they do not indicate an empirically significant decline and may suffer from omitted variable bias. Instead, according to Wieland, estimates of a long-run equilibrium rate obtained with more fully specified structural macroeconomic models have not declined that much. They are positive and statistically quite different from zero. Thus, he concludes that estimates of medium-run r-star should be treated with caution. In his opinion, such estimates do not serve as a reference point for monetary policy decisions.
Volker Wieland
R-Star: The Natural Rate and Its Role in Monetary Policy (PDF)
in: Michael Bordo, John H. Cochrane, Amit Seru (eds.),
The Structural Foundations of Monetary Policy, Hoover Press, March 2018
To the book