Now there is a fiscal r-star and it is worth comparing with the monetary r-star

 

We have lived through the period of focus on r-star, the neutral rate of interest, the long-run equilibrium interest rate, or the natural rate. This is the short-term rate that would prevail when the economy is at full employment and has stable inflation. In this environment, monetary policy is neither expansionary nor contractionary. In that sense, when we reach r-star monetary policy is neutral. Of course, we cannot observe the natural rate. This neutral rate is below 1%. See the recent presentation R-star: A Global Perspective by NY Fed president Williams. It has fallen out of favor because the narrative suggests that monetary policy is very contractionary. Note that there has been recent work on r-double star which focuses on the rate necessary for financial stability.

Now we have fiscal r-star which is developed in the following paper "Fiscal R-Star: Fiscal-Monetary Tensions and Implications for Policy" which is the real rate required to stabilize debt levels when the primary is set by exogenously through some authority. It is the rate that stabilizes a country's debt to GDP ratio given a deficit path with output growing at its potential and inflation is at its target level. Of course, this rate is not observable but has to be calculated. There can be a measurable policy tension between the monetary authority and fiscal authority if there is a gap between the fiscal r-star and the monetary r-star. Of course, this is at the r-star level; however, tight monetary policy when there are huge fiscal deficits will mean monetary and fiscal policy are at odds.