Tuesday, May 16, 2017

A better r*

The Chicago Booth Review published here a much cleaned up and nicely formatted version of my earlier blog post on r*.  If you missed the original and you're curious about r* issues, or just curious what the heck r* is anyway, this version is better.



  1. Eric Lonergan argued (link below) that the R* is nonsense. I agree.


    Re a permanent zero rate, MMTers tend to be keen on that. Warren Mosler supports the idea. I tried to set out the argument for a permanent zero rate in 200 words here:


    As for using interest rates to adjust demand, that strikes me as flawed. First, given a recession, there is no prima facie reason to assume the problem is inadequate lending and investment, rather than an inadequacy in some other element of AD. Second, interest rate adjustments do not work all that quickly: up to a year according to one Bank of England article. I set out further flaws in Part III (sections 10 & 11) here:


  2. John,

    Just a note. U. S federal debt outstanding is $20 trillion and growing. At a nominal 4% short term interest rate, that equates to over $800 billion in interest payments per year.

    For comparison:

    Social Security: $916 billion
    Medicare: $680 billion

    Medicaid: $379 billion

    National Defense: $732 billion


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