Lesson 7 of 7
Wicksell, returned
The natural rate is not a heterodox idea. Central banks estimate it and publish the estimates. What their definition shares with Wicksell's, and where it parts.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- The natural rate survives in mainstream macroeconomics under the name r-star, and the Federal Reserve Bank of New York publishes estimates of it on a stated schedule.
- The modern definition is the real short-term rate expected to prevail when the economy is at full strength and inflation is stable. Wicksell's was the rate that would rule if capital were lent in kind.
- The estimate is a model output, not an observation, and it is revised. Its publishers say so in the same place they publish it.
A reader who has got this far could be forgiven for thinking the natural rate is a private idea belonging to one tradition. It is not. It is estimated quarterly by a Federal Reserve bank and published with the code that produced it.
What the New York Fed published in its latest release
- r-star, real1.65 percent
- Trend growth, g2.49 percent
What the modern definition says
The New York Fed's own words for what its models estimate: r-star is the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable.
The underlying paper is Laubach and Williams, Measuring the Natural Rate of Interest, published in the Review of Economics and Statistics in November 2003 and circulated as a Federal Reserve working paper in 2001. Its opening definition is the real short-term rate consistent with output converging to potential, where potential is the level consistent with stable inflation.
Where it agrees with Wicksell
On the job the concept does. Both definitions are of a rate that is neutral, in the sense that policy set at it is neither pushing nor pulling. Both treat the gap between the actual rate and that rate as the thing with economic consequences, rather than the level of either.
And both say it moves. Laubach and Williams model it as varying about one for one with the trend growth rate of output, which is why the figure above plots the two together.
Where it parts
Three places, and they are worth being precise about.
The modern definition is anchored to inflation. It is the rate consistent with stable inflation and output at potential. Wicksell's is anchored to lending in kind, with no reference to a target.
The modern one is short term and real. Wicksell's was about capital, which is long.
And the modern one is estimated from aggregates, using real output, inflation and the policy rate, filtered through a model. The tradition this track teaches denies that an aggregate can be the starting point of an explanation, which is the methodological argument made in the first course.
Honesty about what the number is
The publishers are careful and so is this lesson. The estimates are model outputs and they are revised: the same page publishes real-time estimates based on the data available at the time as well as current ones, precisely so a reader can see how much they move. The page also states plainly that the estimates are not official forecasts of the Federal Reserve Bank of New York, its president, the Federal Reserve System or the Federal Open Market Committee.
What the track takes from this
That the concept is respectable, and that its measurement is hard for everyone. An Austrian economist arguing that the natural rate cannot be observed is not making an exotic claim. They are describing a difficulty the institutions doing the estimating write into their own documentation.
What the traditions still disagree about is whether the object being estimated is the same object, and that is a question the next two courses do not need to settle.
Check yourself
How does the New York Fed define r-star?
- The yield on the ten-year Treasury
- The real short-term interest rate expected to prevail when the economy is at full strength and inflation is stable
- The average of past policy rates
Show the answer
Answer: B.
That is its own published wording on the page carrying the Laubach-Williams and Holston-Laubach-Williams estimates.What do Laubach and Williams find the natural rate varies with?
- The unemployment rate, inversely
- The trend growth rate of output, about one for one
- The size of the central bank balance sheet
Show the answer
Answer: B.
Their abstract states that their estimates vary about one for one with changes in the trend growth rate, which is why the figure plots r-star beside g.Which is the clearest difference from Wicksell's definition?
- Wicksell used a shorter horizon
- The modern definition is anchored to stable inflation and output at potential, while Wicksell anchored his to lending in kind with no target in view
- Wicksell measured his from aggregates
Show the answer
Answer: B.
The modern rate is also short term and real and is estimated from aggregate series, all three of which are departures from the 1898 construction.Sources
- Federal Reserve Bank of New York, Measuring the Natural Rate of Interest, the published page carrying the Laubach-Williams and Holston-Laubach-Williams estimates, for the definition of r-star, the release schedule, the distinction between real-time and current estimates, and the disclaimer that the estimates are not official forecasts. Figures taken from the LW current estimates spreadsheet, vintage based on data available 26 August 2026 with a final data point of 2026Q2.
- Laubach and Williams, Measuring the Natural Rate of Interest, Federal Reserve Board Finance and Economics Discussion Series working paper, November 2001, published in the Review of Economics and Statistics, volume 85 number 4, November 2003, for the definition of the natural rate used and for the finding that estimates vary about one for one with trend growth.
- Wicksell, Interest and Prices, English translation 1936, chapter 8, for the definition this lesson compares against.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The two figures plotted are model estimates from one published vintage, not observations, and later vintages will differ. Nothing here is a statement about where any rate goes next.
- The one-sided and two-sided example is illustrative of a general property of these estimates rather than a description of a particular quarter.
- Woodford's Interest and Prices, 2003, is the standard modern theoretical treatment of this concept. It was not read for this lesson and nothing is attributed to it.