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 r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* 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 r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*. Accounting for the secular decline in interest rates renders term premia more stable than those based on stationary yield curve models. A previous version of this paper by the same authors entitled “Natural rate chimera and bond pricing reality” has been published as ECB Working Paper No 2612. JEL Classification: E43, C32, E52, C11, G12