The Financial (In)Stability Real Interest Rate, R**, as a Monetary Policy Constraint

One of the central concepts in monetary policy is the natural or neutral real interest rate,
usually referred to as r*. This is defined as the real rate consistent with real GDP equal to
its potential in the absence of shocks to demand. In turn potential GDP is defined to be the
level of output consistent with stable price inflation absent transitory supply shock. (see
Laubach and Williams, 2003).