may ), pp 60 - 65. - - - - - - - - ( 2016 ). “ the age of secular stagnation : what it is and what to do about it, ” foreign affairs, vol. 95 ( march / april ), pp. 2 - 9, https : / / www. foreignaffairs. com / articles / united - states / 2016 - 02 - 15 / age - secularstagnation. appendix here we review the simulations that underlie the estimates of the effects of various economic disturbances for their implications for the long - run equilibrium real federal funds rate, using simulations of the staff ’ s frb / us model. we first provide background on the methodology we use. we then review the nature of the shocks that are discussed in the speech and show the effects of those shocks on the long - run federal funds rate. finally, we provide details about the results shown in the figures. 1. background our point of departure is a definition of the equilibrium interest rate that corresponds with the neutral rate of interest. in particular, we use the definition of the neutral rate of interest that chair yellen used in a 2015 speech : “ the real rate consistent with the economy achieving maximum employment and price stability over the medium term, ” which, in an elaboration in a footnote, is said to be “ usually thought of as independent of the cyclical disturbances that routinely buffet the economy... [ that ] fade away after a few years. ” 1 the sort of disturbances being captured under the rubric of shifts in r * are thus rarer and more persistent than the usual business cycle phenomena and are associated with the “ various adjustment processes that are unusually drawn out by historical standards... [ and have ] slow - moving influences on both aggregate demand and supply. ” 2 this definition corresponds reasonably closely with the ( possibly timevarying ) intercept of a taylor - type rule in that the standard arguments of the see yellen ( 2015a ), paragraph 15 and footnote 4. see yellen ( 2015a ), footnote 4. other definitions of the neutral rate used by the chair in her public communications include the short - term real interest rate “ that would be neither expansionary nor contractionary if the economy was operating near potential ” ( yellen, 2015c, 2016 ) and the short - term real interest rate “ that would be consistent with real gdp expanding in line with potential ” ( yellen, 2015b ).

- as we all know - economic growth lies at the heart of our nation ’ s, and the world ’ s, future prosperity. a second concern is that low interest rates make the economy more vulnerable to adverse shocks that can put it in a recession. that is the problem of what used to be called the zero lower bound on interest rates. in light of several countries currently operating with negative interest rates, we now refer not to the zero lower bound, but to the effective lower bound, a number that is close to zero but negative. operating close to the effective lower bound limits the room for central banks to combat recessions using their conventional interest rate tool - - that is, by cutting the policy interest rate. and while unconventional monetary policies - - such as asset purchases, balance sheet policies, and forward guidance - - can provide additional accommodation, it is reasonable to think these alternatives are not perfect substitutes for conventional policy. the limitation on monetary policy imposed by low trend interest rates could therefore lead to longer and deeper recessions when the economy is hit by negative shocks. and the third concern is that low interest rates may also threaten financial stability as some investors reach for yield and compressed net interest margins make it harder for some financial institutions to build up capital buffers. i should say that while this is a reason for concern and bears continual monitoring, the evidence so far does not suggest a heightened threat of financial instability in the post - financial - crisis united states stemming from ultralow interest rates. however, i note that a year ago the fed did - 3issue warnings - - successful warnings - - about the dangers of excessive leveraged lending, and concerns about financial stability are clearly on the minds of some members of the federal open market committee, fomc. those are three powerful reasons to prefer interest rates that are higher than current rates. but, of course, fed interest rates are kept very low at the moment because of the need to maintain aggregate demand at levels that will support the attainment of our dual policy goals of maximum sustainable employment and price stability, defined as the rate of inflation in the price level of personal consumption expenditures ( or pce ) being at our target level of 2 percent. that the actual federal funds rate has to be so low for the fed to meet its objectives suggests that the equilibrium interest rate - - that is, the federal funds rate that will prevail in the longer run, once cyclical and other transitory factors have played out - has fallen. 2 let