R* (R-Star)
The real neutral interest rate: the rate that’s neither expansionary not contractionary when a debt-driven economy is at full employment.
Calculations
- NY Fed
- Uses Laubach-Williams and Holston-Lauback-Williams (see 2017 and 2023) models to calculate r*
In Practice
R* can guide the Fed when setting the Federal Funds Rate while the economy is considered to be at full employment.
A target, neutral FFR should approach and eventually be equal to the nominal r*, which can be calculated as such: