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Estimating the Natural Yield Curve in Japan Using a VAR with Common Trends

Author

Listed:
  • Yudai Hatayama

    (Bank of Japan)

  • Yuto Iwasaki

    (Previously Bank of Japan)

Abstract

This paper introduces a novel approach for simultaneously estimating nominal and real natural yield curves in Japan. Specifically, we employ macroeconomic variables (output gap and inflation rate) as observed variables, in addition to the nominal and real yield curves, and conduct an estimation combining the representative yield curve model, the Nelson-Siegel model (Nelson and Siegel, 1987), with a VAR with common trends (Del Negro et al., 2017). The results presented in this paper indicate that since the 1990s, both nominal and real natural yield curves have exhibited downward shifts, as a consequence of a decline in the natural rate of interest. Furthermore, both curves have flattened due to a trending decline in the term premium. The results also indicate that the extent of these changes differs between the nominal and real natural yield curves. However, it should be noted that the estimation of natural yield curves is still in the process of development. Consequently, the results should be interpreted with caution.

Suggested Citation

  • Yudai Hatayama & Yuto Iwasaki, 2024. "Estimating the Natural Yield Curve in Japan Using a VAR with Common Trends," Bank of Japan Working Paper Series 24-E-17, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp24e17
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    File URL: https://www.boj.or.jp/en/research/wps_rev/wps_2024/data/wp24e17.pdf
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    References listed on IDEAS

    as
    1. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
    2. Lukasz Rachel & Thomas D. Smith, 2017. "Are Low Real Interest Rates Here to Stay?," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 1-42, September.
    3. Michael T. Kiley, 2020. "The Global Equilibrium Real Interest Rate: Concepts, Estimates, and Challenges," Annual Review of Financial Economics, Annual Reviews, vol. 12(1), pages 305-326, December.
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    Cited by:

    1. Shunsuke Haba & Ryuichiro Hirano & Yuichiro Ito & Sohei Kaihatsu, 2026. "Changes in Perceptions about Monetary Policy: Estimating the Policy Reaction Function Using Market Survey Data," Bank of Japan Working Paper Series 26-E-5, Bank of Japan.
    2. Kazumasa Iwata, 2025. "Comment on “Understanding the Normalization of the Japanese Economy”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 20(2), pages 205-206, July.

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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