This is a quite different post than others, more of a series of questions about r* than an opinion. And while the answers of amateurs like myself are welcome, I really would like to hear from people that know what they are talking about and who use r* professionally.
Brooking’s definition[1] of r* is:
“the short-term interest rate that would prevail when the economy is at full employment and stable inflation: the rate at which monetary policy is neither contractionary nor expansionary.”
There are several points to be made:
1. The definition seems to imply a model in which there is only one ST interest rate and (by strong implication) THE only instrument of monetary policy.
2. The definition implies that there IS at least one inflation rate that is consistent with “full employment” of labor, (taking this to be binary, full/less than full) but silent on whether there might be more than one.
3. The definition is likewise silent on whether the output that “inflation” refers to is a single good and hence that “inflation” is the rate of change of that single good (produced by a single “labor” input) or if output is heterogeneous and “inflation” is an index of rates of change of the different goods (which might imply that employment of labor could be full in the output of some goods and less than full in others.
First question: does the definition apply only to a one good, one input, one ST interest rate model. If not, how does it need to be modified to apply to a multi-good, multi-input economy.
Second question: In the one good one input model, is there necessarily a “Phillips Curve” in which r < r* implies a (stable?) inflation rate > than the inflation rate consistent with r* and/or in which r < r* implies a (stable?) inflation rate < than inflation consistent with r*? (and less than full employment)? Why does this relation arise?
Third question, mainly directed at “Team Transitory:” can or how can supply shocks and/or supply chain disruptions be consistent with a one-good, one-input model?
Forth question: Stipulating that there can be only one ST interest rate in a one-good, one-input model, does or how does r* apply if, in a multi-good, multi-input model in which there could be more than one ST interest rate and/or more than one monetary policy instrument?
Fifth question: Given that r* is an equilibrium concept and is estimated from other economic data, if rt ≠ r*, does or how does estimating r* aid in estimating what rt+1 should be? If Data => r* => r t+1 given rt, why not Data => r t+1 directly?
Sixth Question: Granting that r* were useful to estimating what rt+1 should be, how useful is r* estimated at t-n? How stable is r*?
Seventh Question: Still granting that r* were useful to estimating what rt+1 should be, if there is more than one rate of inflation that is consistent with full employment (and so more than one r*), how should the inflation rate and r* be chosen?
My own views relevant to these questions are to be found at:
Supply and Demand in Disinflation – A Reply to Bourne
The Lessons of Pandemic Inflation
The Rise and Fall(?) of the Phillips Curve
Ideally, they will be critiqued in the course of replying to this post.
[1] https://www.brookings.edu/articles/the-hutchins-center-explains-the-neutral-rate-of-interest/#:~:text=The%20neutral%20rate%20of%20interest%20(also%20called%20the%20long%2Drun,is%20neither%20contractionary%20nor%20expansionary.
Interesting thoughts
Interest rates enthusiasts are always "wrong"!
https://marcusnunes.substack.com/p/a-simpler-view-of-monetary-policy