A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt
The Review of Economics and Statistics
2019
open access
The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.
- DOI
- 10.1162/rest_a_00821
- Volume
- 101 (5)
- Pages
- 933-949
- Language
- en
- Export
- BibTeX
- Sources
- crossref openalex