Estimating the Natural Rate of Interest in a Macro-Finance Yield Curve Model

Using a novel macro-finance model, we infer jointly the equilibrium real interest rate rt∗, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model rt∗ plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated rt∗ declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer rt∗. Accounting for the secular decline in interest rates renders term premia more stable than those based on stationary yield curve models.