The natural rate of interest and mo

The natural rate of interest and monetary conditions
To evaluate monetary conditions it is helpful to think in terms of the interest rate gap, which is the
difference between the observed real interest rate—that is, the nominal short-term interest rate minus
expected inflation—and the natural rate of interest. A positive interest rate gap indicates tight monetary
conditions and is associated with weak demand and a negative output gap. This is what has happened in
the United States since the financial crisis, as shown in Figure 2. The blue line is the median interest rate
gap at an annual rate, and the red line is
the median output gap.