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A Critical Review of the Real Interest Rate Concept

The neutral real interest rate (NRIR) is defined as the level of the real interest rate that is consistent with low and stable inflation and real production corresponding to potential production. To put it differently: the NRIR is the rate consistent with the output gap (y- y*) and inflation gap (π - π*) being zero, where y (y*) represents (potential) output and (π - π*) is actual (target) inflation.

Belke, A., M. Leschke, W. Kösters and T. Polleit (2008), A Critical Review of the Real Interest Rate Concept. In Dirk Loerwald, Maik Wiesweg and Andreas Zoerner (Hrsg.), Ökonomik und Gesellschaft: Festschrift für Gerd-Jan Krol. Wiesbaden: VS Verlag für Sozialwissenschaften, 362-375.

DOI: 10.1007/978-3-531-91057-4_23