Interest Rates Under Falling Stars

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Theory predicts that the equilibrium real interest rate, r* t, and the perceived trend in inflation, π* t , are key determinants of the term structure of interest rates. However, term structure analyses generally assume that these endpoints are constant. Instead, we show that allowing for time variation in both r* t and π* t is crucial for understanding the empirical dynamics of U.S. Treasury yields and risk pricing. Our evidence reveals that accounting for fluctuations in both r* t and π* t substantially increases the accuracy of long-range interest rate forecasts, helps predict excess bond returns, improves estimates of the term premium in long-term interest rates, and captures a substantial share of interest rate variability at low frequencies. JEL-Codes: E430, E440, E470. Terms of use: Documents in

Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?

“…Instead, one could simply rely on the estimated parameters from the matching standard model. 5 Unfortunately, we find that the differences in the estimated parameters can be sizable and economically important. Thus, while we cannot endorse the approach of relying on estimated parameters from a standard model as a way of implementing the corresponding shadow-rate model, our results still suggest that its optimal parameters do provide a reasonable guess of where to start the parameter optimization in the estimation of the shadow-rate model.…”