The neutral rate evidently varies over time as the potential growth rate of the economy changes – which in turn is typically a function of the demographic profile, the fiscal stance of the government and technological changes. In a rapidly growing economy like that of India, the structural changes make the potential growth rate even more variable.
Instead, as the scatterplot makes clear, the volatilities of both inflation and detrended output have been remarkably low under EMU, lower than in more flexible economies. What can reconcile the facts with the structural evidence?