of 2 percent. 2 for policymakers, the natural questions — pardon the pun — were : is 2 percent the right number? does it change over time? and how would we know? those were the very questions than then - federal reserve governor larry meyer posed to board staff back in 2000. and that's what brought thomas and me together. a meeting of minds in july of that year, i returned to the board from a stint at the council of economic advisors, shortly after thomas joined the board staff from the kansas city fed. we hit it off immediately. it just so happened that both of us had been thinking about the natural rate of interest. and since governor meyer had raised the subject, we moved quickly to develop an approach to answer his questions. although we didn't know it then, we were following exactly the problem the other john williams laid out in 1931. 3 simply put, thomas had a hammer. and we found a new nail. the hammer was the kalman filter, which is about inferring the behavior of an object from its effects on other objects. and the nail was r - star. a fast start on december 14, 2000, after a few short months of working together, we wrote our ideas and results in a memo to the board of governors. 4 the memo started with the bold declaration : " this memo is a first report on a broader project to study alternative definitions and estimates of the equilibrium real rate ( r * ) and to evaluate their usefulness in the conduct of monetary policy. " and the laubach - williams ( lw ) model was born. starting in may 2001, r - star estimates made their way into the staff bluebook prepared for the fomc. 5 looking back, i am struck by how quickly these ideas came together. i must also acknowledge the unwavering support we received from senior leadership to bring this new research to policymakers. within a year of writing the memo, we put out the academic version of this work. 6, 7 the original paper included a section on timevarying r - star's implications for monetary policy. but the editor cut it, leaving it " for future research. " what's past is prologue fast forward a decade, and an entirely new question about r - star arose : why had estimates of r - star fallen so low? it's a topic thomas and i explored in our " redux " paper. 8 and in 2017, kathryn, thomas, and

negative fiscal impulse. how this tug - of - war gets resolved – which force dominates – won ’ t be known for some time. in other words, the level of uncertainty about the near - term outlook in the united states remains quite high. meanwhile, the long - term fiscal outlook for the united states is still troubling. so far, partisan divisions in washington have limited progress in reaching the type of “ grand bargain ” needed to put the united states on a sustainable long - term fiscal path, though of late we have at least seen some renewed talk about this. nor have we yet deployed a comprehensive set of policies to support the rebalancing of the u. s. economy toward a growth path based more on business investment, trade and broad - based income gains than the type of asset price gains and credit - fuelled consumption, which dominated the last business cycle. for europe, the near term macroeconomic outlook seems less bright. the good news is that the peripheral countries have made substantial efforts to bring down their structural budget deficits. they have also made some progress in improving their international competitiveness, though there remains an opportunity for further structural reforms in labor and product markets – and not just in the periphery – to increase productivity and strengthen long term growth prospects. the european central bank ’ s ( ecb ) introduction of the outright monetary transactions ( omt ) program has reduced financial market tensions considerably in the peripheral countries, so that sovereign debt funding costs in those countries are at more reasonable levels. the risk that interest rates in the periphery could spiral upward has been significantly diminished. also, the commitment to european integration remains strong, a factor that u. s. based analysts and investors do not always sufficiently appreciate. over the past few years, when the situation has been the most bleak, the choice in favor of the union with the euro at its core has always won out. the bad news is that the eurozone is still in a recession and the political support for further rounds of budget - tightening has clearly lessened. the eurozone financial system is being fragmented and the partial easing of pressure on peripheral sovereign debt markets has not translated into a corresponding easing in private - sector borrowing costs in these nations. if growth does not resume relatively soon, then the political support for continued fiscal and structural adjustment could further erode. in europe, a key challenge is to strengthen the economic foundations of monetary union at the system level. this needs to be done in a way that combines deeper integration with