The natural rate of interest (r*) as a reference point for monetary policy - a practitioner's view

May 30, 2024
The natural rate of interest (r*) as a reference point for monetary policy - a practitioner's view, Seoul

Summary

Over the past years, the natural rate of interest (r*) - defined as the real interest rate consistent with stable inflation in an economy operating at full capacity in the medium term - has become an important reference point for monetary policy. The difference between the real interest rate and r* gives a measure of a central bank's monetary policy stance. Monetary policy is restrictive if the real interest rate is above r* and it is expansionary if it is below r*. Therefore, evaluating where the real interest rate is relative to r* helps to structure discussions about monetary policy options. 
However, r* is unobserved and has to be estimated from the data. These estimates are subject to considerable uncertainty, which complicates their use in the monetary policy process. Nevertheless, neglecting r* estimates in practical monetary policy considerations would be a mistake.
Given the uncertainty surrounding r* estimates, it is an important task of our economists to form a robust view on r*. They derive this view from a portfolio of different models and cross-check the results against a broader set of indicators to arrive at a measure of r* that is useful for monetary policymaking. This measure plays an important role in our monetary policy decisions. First, it is an important element in assessing monetary conditions. However, other factors - such as real exchange rates - also play an important part in this assessment at the SNB. Second, the deviation of the real interest rate from r* is essential for our inflation forecast and thus for gauging medium-term inflationary pressure. 
Uncertainty surrounding r* estimates can be narrowed down to some extent, but it cannot be eliminated. Our risk management approach to monetary policymaking acknowledges the uncertainty and prescribes that policy decisions be appropriate for a range of scenarios. Ultimately, our decisions are guided by our mandate of ensuring price stability.

Download file now

The file can be downloaded with the button below.

Additional files

Related content

Author(s)

  • Thomas Jordan
    Chairman of the Governing Board

Your settings

Required: These cookies (e.g. for storing your IP address) cannot be rejected as they are necessary to ensure the operation of the website. These data are not evaluated further.
Analytics: If you consent to this category, data such as IP address, location, device information, browser version and site visitor behaviour will be collected. These data are evaluated for the SNB's internal purposes and are kept for two years.
Third-party: If you consent to this category, third-party services (used, for example, to add social multimedia content to the SNB's website) will be activated which collect personal data, process these data, disclose them abroad - worldwide - and place cookies. The relevant data protection regulations are linked in the 'Privacy statement for the website of the Swiss National Bank'.

Choose your preferred settings:

This website uses cookies, analytics tools and other technologies to provide requested features, content and services, to personalise the content shown, to provide links to social media, and to analyse the use of the website in anonymised form for the purposes of improving usability. Personal data are also disclosed abroad - worldwide - to video service providers and the analytics tools of these providers are used. More information is available under 'Manage settings'.