Part 2

What is the neutral rate?

In the simplest ways, r-star can be described as the rate of interest at which the economy neither grows nor slows. And it matters where the r-star is because interest rates matter. 

Here’s a quick flashback to how interest rates work. When the Federal Reserve wants to increase borrowing costs, one way it will do so is by raising the interest rate that depository institutions charge to lend each other reserve balances on an overnight basis, also known as the Federal funds rate. That, ...

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Intermediate icon
Intermediate
Why The Mysterious R-Star Should Be on Your Radar
4 Lessons
~7 mins in total
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