Odd Lots An IMF Economist On The Challenge Of Finding The Neutral Rate Of Interest
Oct 5, 2020
Peter Williams, a research analyst at the IMF known for his insights on interest rates, discusses the elusive Neutral Rate of Interest (R*). He delves into the complexities of identifying this rate, explaining its critical role in balancing the economy. Williams highlights the challenges economists face in inflation targeting and the evolving perceptions of R* since 2018. He also examines the need for new strategies in monetary policy, especially in light of recent economic disruptions and the impact of the COVID-19 crisis.
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Post-Crisis Economic Shift
- The post-crisis period challenged established economic relationships, like the link between unemployment and inflation.
- Extremely accommodative monetary policy didn't have the expected impact, raising questions about economic fundamentals.
Influences on R-star
- R-star, the neutral rate of interest, is influenced by factors like potential growth, demographics, and inequality.
- Policies to increase R-star might include structural reforms that boost growth, but there's no guaranteed solution.
Critique of Economic Models
- Some critique traditional economic models for having embedded ideologies against government spending and full employment.
- Peter Williams views this critique with skepticism, emphasizing that policy decisions require models grounded in real-world conditions.