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Measuring the Natural Yield Curve

Author

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  • Jacek Kotłowski
  • Michał Brzoza-Brzezina

Abstract

We generalize the concept of the natural rate of interest (Laubach i Williams, 2003; Woodford, 2003) by defining and estimating the the natural yield curve (NYC) - the term structure of natural interest rates. Our motivation stems i.a. from the observation that at times when central banks attempt to directly affect long-term interest rates (e.g. via quantitative easing) the gap between the short-term real and natural rate is no more a good indicator of the monetary policy stance. We used the Nelson-Siegel approach to model the natural yield curve. Using a framework similar to Laubach i Williams (2003) we show how to estimate the NYC on US data. We show that the gap between the real and natural curves has an impact on the output gap and inflation. Furthermore we demonstrate how, in contrast to the short-term interest rate gap, our gap is able to document the expansionary stance of the Fed's monetary policy during and after the financial crisis.

Suggested Citation

  • Jacek Kotłowski & Michał Brzoza-Brzezina, 2012. "Measuring the Natural Yield Curve," EcoMod2012 4197, EcoMod.
    • Handle: RePEc:ekd:002672:4197
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    File URL: http://ecomod.net/system/files/NYC.pdf
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    Cited by:

    1. Brand, Claus & Goy, Gavin W & Lemke, Wolfgang, 2020. "Natural rate chimera and bond pricing reality," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224546, Verein für Socialpolitik / German Economic Association.
    2. Dufrénot, Gilles & Rhouzlane, Meryem & Vaccaro-Grange, Etienne, 2022. "Potential growth and natural yield curve in Japan," Journal of International Money and Finance, Elsevier, vol. 124(C).
    3. NAKAJIMA, Jouchi & SUDO, Nao & HOGEN, Yoshihiko & TAKIZUKA, Yasutaka, 2023. "On the estimation of the natural yield curve," Discussion Paper Series 753, Institute of Economic Research, Hitotsubashi University.
    4. Adam Kucera & Milan Szabo, 2019. "Estimating the neutral Czech government bond yield curve," Occasional Publications - Chapters in Edited Volumes,, Czech National Bank, Research and Statistics Department.
    5. Kei Imakubo & Haruki Kojima & Jouchi Nakajima, 2018. "The natural yield curve: its concept and measurement," Empirical Economics, Springer, vol. 55(2), pages 551-572, September.
    6. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Monetary policy strategy and inflation in Japan," Occasional Papers 2116, Banco de España.
    7. Brand, Claus & Goy, Gavin W & Lemke, Wolfgang, 2020. "Natural rate chimera and bond pricing reality," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224546, Verein für Socialpolitik / German Economic Association.
    8. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Estrategia de política monetaria e inflación en Japón," Occasional Papers 2116, Banco de España.

    More about this item

    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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