Natural Rate Chimera and Bond Pricing Reality

Abstract

Incorporating arbitrage-free term-structure dynamics into a semi-structural macro-model, we jointly estimate the real equilibrium interest rate (r *), trend inflation, and term premia for the United States and the euro area, using a Bayesian approach. The natural real rate and trend inflation are cornerstones determining equilibrium yields across maturities and macroeconomic trends. Taking into account the secular decline in equilibrium rates, term premia exhibit cyclical behavior over the business cycle, rather than the commonly reported trend. Our estimates suggest a fall in r * from a pre-crisis level of about 3% to around zero, but estimates are subject to sizeable uncertainty. Including survey expectations can lift r * estimates for recent quarters by a margin.

A Structural Investigation of Quantitative Easing

“…. Similarly, the semi-structural estimates ofLaubach and Williams (2003) andBrand et al (2020) indicate weak relationships between inflation and economic slack, in line with structural estimates of Del Negro et al (2015) andKulish et al (2017). Finally, a similar flattening has been documented for the wage Phillips curve by e.g Daly and Hobijn (2014)…”

“…There is an extensive literature that documents a fall in the natural rate of interest and trend inflation since the 1980s (see e.g Laubach and Williams, 2003;Brand et al, 2018Brand et al, , 2020…”

A Structural Investigation of Quantitative Easing

“…. Similarly, the semi-structural estimates ofLaubach and Williams (2003) andBrand et al (2020) indicate weak relationships between inflation and economic slack, in line with structural estimates of DelNegro et al (2015) andKulish et al (2017). Finally, a similar flattening has been documented for the wage Phillips curve by e.g Daly and Hobijn (2014)…”

The (Ir)Relevance of the Nominal Lower Bound for Real Yield Curve Analysis

“…The analysis could thus be extended upon in the future by introducing greater flexibility in this regard as suggested by, e.g., Bauer and Rudebusch (2019) or Brand, Goy, and Lemke (2020), who allow for a unit root in their expectations components. Another aspect that could be addressed in future work, is the possibility of a more structural modelling of the inflation process by inter alia adding more macroeconomic structure to the model.…”