R-star, or r*, is the real neutral rate of interest that keeps the economy steady over the long run when we're at full employment with stable inflation.

By steady, we mean neither expanding nor contracting.

R-star is a theoretical number that can't be known in real-time, but it is often estimated. Central banks use it in models to judge whether interest rates are too stimulative or restrictive.

For Canada, r* is estimated at roughly 0.50% to 1% over the long term.

Source: Brookings Institution

Because Canada is a small open economy, global forces sway our r* more than what’s happening here at home, the Bank of Canada says.

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