This seems especially germane in the current environment in which very low longterm government bond yields in Europe and Japan appear to have been an important factor in pulling U.S. long-term yields lower over the past year or so. •  Given the uncertainties about the current and future levels of the equilibrium real short-term rate, an inertial policy rule may lead to better outcomes. As a consequence, the process of normalization of monetary policy should proceed cautiously, with short-term interest rates more likely to rise only gradually toward the equilibrium real short-term rate. BIS central bankers’ speeches  1  That said, I think the paper leaves some open questions worthy of further exploration. First, although the equilibrium real short-term interest rate, which I will refer to as r*, is only loosely related to real potential GDP growth, could we do better if we were to decompose real potential GDP into its components – such as the growth rates of labor input and productivity – and examine the relationship between r* and each component separately? Second, accepting the principle that an inertial monetary policy rule performs better as uncertainty about the level of the equilibrium real short-term rate increases, what does this imply for monetary policy under current circumstances? Third, in light of the evidence on the volatility of the equilibrium real short-term rate, what are the implications of adopting a Taylor-type rule as a benchmark for monetary policy evaluation?
I will argue that in the U.S. context, a Taylor-type rule – even an inertial one – is an incomplete guide for policy because it does not explicitly include financial variables that are important factors in the transmission of monetary policy to the real economy. Finally, I will briefly comment on the issue of secular stagnation and my views on the long-term equilibrium real federal funds rate. Turning to the first issue of the relationship between real potential GDP growth and the equilibrium real short-term interest rate, the authors find, at best, only a very loose relationship. I would have welcomed some further work here, more closely focused on the components of real potential GDP growth – such as labor input and productivity – and their potential links to the level and dynamics of the equilibrium real short-term rate. First, I would look more closely at the demographic factors that influence the amount of labor input. In my view, it seems plausible that when the labor force is rising rapidly, this might put upward pressure on r* by increasing the demand for capital needed to equip the new army of workers. This might have been particularly relevant during the late 1970s when the labor supply in the U.S. was rising rapidly due to the influx of the baby boom generation into the workforce and the climb in female participation rates. Second, the equilibrium real short-term rate might be influenced by the productivity growth rate.