R* (R-Star)

#glossary #economics #finance

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:

1. Take the real neutral interest rate, r*

2. Take the Fed's primary inflation measurement of concern, i. At the time of this writing (Sept 2024), this is PCE. CPI may also be used, for example

3. The nominal neutral interest rate is the sum r* + i