Can you use potential GDP growth instead of the neutral interest rate in the taylor rule?

If I wanted to use the Taylor rule to estimate where interest rate ‘should’ be, can I use potential GDP growth instead of the equilibrium real interest rate?

I have the output gap, the inflation rate, the nominal interest rate and the target inflation rate already.

I don’t want to use a long-run average of the interest rate to estimate the neutral rate because they’re probably quite different from one another at the moment.

My boss has suggested using potential GDP growth as the neutral rate, but I don’t understand why.

IANA economist, but …

There is a general economic theory / rule of thumb that over the long term, the risk-free interest rate approximates the *actual *GDP growth. In a general arm-waving sense you can see why; both are essentially statements about where the future is expected to end up.

If you imagine them being well out of whack you can see the counterargument that they should be in more or less in sync. 25% interest rates in a 2% growth economy? Where will enough money come from in the medium term, say 15 years, to pay the interest? There can’t possibly be enough in the out years.

But I think that is a little bit like the arguments about purchasing power parity vs currency exchange rates. The long term can be a very long time and things can be well out whack for years or decades based on secular or cyclical factors.

Plugging potential, not actual, GDP into an equation like Taylor is, IMO, just multiplying 6 WAGs together & then claiming your answer has 4 digits of precison after the decimal point. Then again, a lot of econometrics is like that.

And again, IANA economist.