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Equilibrium Interest Rate and the Yield Curve in a Low Interest Rate Environment

Author

Listed:
  • Hibiki Ichiue

    (Bank of Japan)

  • Yoichi Ueno

    (Bank of Japan)

Abstract

Equilibrium nominal interest rates are useful indicators for both monetary policy authorities and market players. However, there are few studies which estimate Japan's equilibrium rate because of its persistent low interest rate. We overcome this challenge by using survey forecasts of interest rates and macroeconomic variables to estimate a two-factor yield curve model, which takes the bound of zero interest into account. We found that: 1) the equilibrium rate is roughly approximated with the long-run expected nominal output growth rate; 2) the Bank of Japan's commitments successfully lowered yields even at zero interest; and 3) the term premium of 10-year yield has had a downtrend since 2004.

Suggested Citation

  • Hibiki Ichiue & Yoichi Ueno, 2007. "Equilibrium Interest Rate and the Yield Curve in a Low Interest Rate Environment," Bank of Japan Working Paper Series 07-E-18, Bank of Japan.
  • Handle: RePEc:boj:bojwps:07-e-18
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    References listed on IDEAS

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    More about this item

    Keywords

    Equilibrium interest rate; Black's model of interest rates as options; Monetary policy; Macro-finance; Survey data;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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