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Equilibrium Real Interest Rates – concepts, current and future drivers: New insights and policy implications

A secular decline in r* was one of the key drivers of the strategy reviews carried out by the ECB and the FED in the years 2019-2021. While we have seen an increase in r* after the multiple shocks that started with the Covid crisis, it is not clear whether the secular decline in r* may have stopped or reversed or whether this increase is only temporary. This is an important question in the short-term because it will give an indication of how much central banks have to tighten to reign on inflation. In the medium and long-term it is important because it will influence the type of instruments that central banks should have in their toolkits if we were again approaching the effective lower bound on interest rates.