Back then, the risk of inﬂation approaching very low levels was already on the minds of Council members. As Otmar Issing stressed at that time: “We have both eyes […] watching deﬂationary as well as inﬂationary developments.” [3] Since then, the ability of central banks to prevent very low rates of inﬂation through the conduct of interest rate policy has weakened.
From a theoretical point of view, monetary policy needs to push the key interest rate in real terms below the natural rate of interest, or “r star”, in order to achieve an expansionary stance. Thus, “r star” is often regarded as a navigational guide for monetary policy, just as celestial stars used to guide sailors across the seas.