The BIS Quarterly Review had a recent paper on r* (the preferred term for the “natural rate of interest”) by Benigno, Gianluca, Boris Hofmann, Galo Nuño Barrau, and Damiano Sandri. “Quo vadis, r*? The natural rate of interest after the pandemic.” This paper is an example of why I have largely given up on the DSGE literature. From my perspective, the contents may be summarised as:
thanks for reviewing our paper! I read with interest your posts indeed and have learned a lot from it along with other contributors that are not necessarily mainstream. In all fairness though, our piece is quite critical of the standard approach. As you note it aims at providing an overview (short because of space constraint) of the r* concept. At the same time in the monetary policy section we point out at less mainstream perspective on medium rum real rates and their determinants. If anything I would say that there is a bit of a critical perspective on r* as a guidepost for monetary policy. In my next posts I will provide an alternative concept that points out at the importance of financial factors in dictating the business cycle.
On a roll. Show me where 10Y real yields are and I will tell you where all the illuminated will gravitate towards with their measure of r*. And real yields are mostly a reflection of real policy rate expectations. All rather un-luminating, so to speak.
It seems that what you're saying is that DSGE models are guilty of the philosophical sin described by Bertrand Russell: "The method of 'postulating' what we want has many advantages; they are the same as the advantages of theft over honest toil."
Hi Brian:
thanks for reviewing our paper! I read with interest your posts indeed and have learned a lot from it along with other contributors that are not necessarily mainstream. In all fairness though, our piece is quite critical of the standard approach. As you note it aims at providing an overview (short because of space constraint) of the r* concept. At the same time in the monetary policy section we point out at less mainstream perspective on medium rum real rates and their determinants. If anything I would say that there is a bit of a critical perspective on r* as a guidepost for monetary policy. In my next posts I will provide an alternative concept that points out at the importance of financial factors in dictating the business cycle.
On a roll. Show me where 10Y real yields are and I will tell you where all the illuminated will gravitate towards with their measure of r*. And real yields are mostly a reflection of real policy rate expectations. All rather un-luminating, so to speak.
It seems that what you're saying is that DSGE models are guilty of the philosophical sin described by Bertrand Russell: "The method of 'postulating' what we want has many advantages; they are the same as the advantages of theft over honest toil."