The four R-Stars: from interest rates to inflation and back

Abstract

Where are interest rates going? The answer to this question can be stated in terms of what R-star (or R*) is: the long-run common component of all relevant interest rates in the economy. By definition, we cannot directly observe this variable. It is a latent trend driving the co-movement of different variables, a model counterfactual, or a policy benchmark. Measuring it is a daunting task. And yet, economists have done it in many and intricate ways, since the stakes are high.