The Equilibrium Real Policy Rate through the Lens of Standard Growth Models The Equilibrium Real Policy Rate through the Lens of Standard Growth Models

By Daniel E. Sichel and J. Christina Wang

This paper focuses on the roles that total factor productivity (TFP) and potential growth play in determining the equilibrium real policy rate, a concept generally defined as the real interest rate that prevails when the economy is at full employment and inflation is at the central bank’s target rate. It’s an important factor in monetary policy decision-making that has gained prominence lately as the Federal Reserve continues to normalize the stance of monetary policy by raising the policy rate.

The analysis uses single-sector models for a baseline, but it places more emphasis on the multi-sector neoclassical growth model, which better fits the data from the past three decades. Within the framework of these standard growth models, the authors assess the evolution, current level, and prospective values of the equilibrium real policy rate.

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