A Hitchhiker’s Guide to the r * Galaxy: Introducing a Global Framework for Estimating the Natural Rate of Interest

Abstract This paper introduces a transparent and scalable framework for approximating the natural rate of interest (r*) across 155 advanced, emerging, and developing economies using widely available annual macroeconomic data over 1980–2024. The proxy is constructed as a centered five-year average of ex post real policy rates, with greater weight assigned to observations in which output is closer to potential. It is designed to capture persistent medium-run movements in equilibrium real rates rather than provide a real-time benchmark for monetary-policy calibration. The estimates reveal a pronounced decline in global r* from the late 1990s through the late 2010s, alongside substantial and persistent cross-country heterogeneity. Emerging and developing economies generally exhibit higher equilibrium real rates than advanced economies. In fixed-effects regressions, population aging and government debt are negatively associated with the estimated r* proxy, while financial openness is positively associated with it. The relationship with trend real GDP per capita growth is positive but not precisely estimated in the fully specified model, and the current-account balance is statistically insignificant. The structural correlates also differ significantly between advanced economies and emerging and developing economies, particularly for government debt and financial openness. By extending equilibrium-rate measurement across a much broader historical and geographical sample, the paper provides a practical framework for comparative macro-financial analysis and future research on the global determinants of r*.