3  See M. Woodford, Interest and Prices, Princeton University Press, 2003. 2  BIS central bankers’ speeches  rate of interest is the short-term real interest rate which would prevail in an ideal “real economy”, where nominal variables play no role. In such an economy, monetary policy would have no reason to exist.
All economic variables would be determined independently of the actions of the central bank. In this ideal world, a prolonged economic contraction would be accompanied by an initial fall, and then by a gradual recovery of the natural rate of interest. The level and the persistence of the natural rate of interest are linked to the pace of the economic recovery.