Navigating the sea of natural real interest rate estimates

Abstract

Recent inflationary trends have reignited debates about the natural real interest rate (r∗). This paper reviews the literature on estimating r∗ and its drivers, highlighting significant uncertainty and variability in estimates. The challenges in achieving consensus on r∗ is mostly due to differing methodologies and model assumptions. Understanding these sources of uncertainty is essential for shaping future monetary policy, especially in a low interest rate environment where conventional policy tools may be limited.