The natural rate of interest—the real short-run rate consistent with the economy at potential—is essential for central banks’ policy rate calibration. However, empirical model-based estimates are often too imprecise and volatile for practical policymaking. Purely statistical measures, meanwhile, lack sufficient theoretical grounding. This paper proposes a medium-run natural rate measure that smooths excessive short-term fluctuations while maintaining theoretical foundations to be optimal under certain conditions. We provide a framework for evaluating policymakers’ concerns about natural rate estimates. Results show that a five-year duration strikes a reasonable balance, remaining both empirically tractable and theoretically sound.
Suggested citation:
Cúrdia, Vasco. 2026. “Monetary Policy and The Medium-Run Natural Rate Interest.” Federal Reserve Bank of San Francisco Working Paper 2025-24. https://doi.org/10.24148/wp2025-24