Rethinking Short-Term Real Interest Rates and Term Spreads Using Very Long-Run Data

Utilizing critical recent data advances, we analyze short-maturity real interest rates as well as term spreads based on conceptually consistent multi-century data. In contrast to an extensive literature the past few decades, we find strong evidence of trend stationarity in long horizon series, relatively fast adjustment speeds, and a paucity of structural breaks — results that survive out of sample tests. Our evidence runs contrary to consensus in the literature that long-run r* is permanently lower post-financial crisis. Relatedly, we show that term spreads are secularly rising while inflation volatility falls — a finding questioning some influential term structure models.