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Quo vadis rstar

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  • Jean-Francois Mercier

Abstract

Economists generally agreed that neutral real interest rates (r*) had declined in the decades preceding the Covid-19 crisis, in both advanced and emerging economies. However, analyses differed as to the drivers of that decline. While past pandemics generally tended to depress neutral rates, policy responses and low mortality among the active population limited the direct impact of Covid-19 on r*, at least in major economies. Beyond Covid-19, trends in other drivers of neutral rates (demographics, potential growth, public debt) suggest that r* should remain low in coming years. However, r* may not be declining further and could even edge up modestly in the short term. That said, the latest supply shocks have increased challenges in measuring short-term changes to r*. Hence, central banks may place less focus on r* in the near term, at least until the current inflation shock has abated.

Suggested Citation

  • Jean-Francois Mercier, 2023. "Quo vadis rstar," Occasional Bulletin of Economic Notes 11046, South African Reserve Bank.
    • Handle: RePEc:rbz:oboens:11046
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    File URL: https://www.resbank.co.za/content/dam/sarb/publications/occasional-bulletin-of-economic-notes/2023/quo-vadis-r-star-june-2023.pdf
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