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A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt

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Some have argued that Treasury yields have been pushed down by lower longer-run expectations of the safe, short-term real interest rate—that is, by a drop in the so-called equilibrium or natural rate of interest. We examine this possibility using an arbitrage-free dynamic term structure model estimated directly on prices of individual inflation-indexed bonds with adjustments for real term and liquidity risk premiums. We find that a lower expected short real rate has accounted for about 2 percentage points of the general downtrend in yields over the past two decades and that this situation seems unlikely to reverse quickly.

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  • Christensen, Jens H. E. & Rudebusch, Glenn D., 2017. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt," Working Paper Series 2017-7, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2017-07
    DOI: 10.24148/wp2017-07
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    1. Gauti B. Eggertsson & Neil R. Mehrotra & Sanjay R. Singh & Lawrence H. Summers, 2016. "A Contagious Malady? Open Economy Dimensions of Secular Stagnation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 581-634, November.
    2. Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2015. "A probability-based stress test of Federal Reserve assets and income," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 26-43.
    3. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    4. Lukasz Rachel & Thomas Smith, 2015. "Secular Drivers of the Global Real Interest Rate," Discussion Papers 1605, Centre for Macroeconomics (CFM).
    5. Lubik, Thomas A. & Matthes, Christian, 2015. "Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Oct, pages 1-6.
    6. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
    7. James D. Hamilton & Ethan S. Harris & Jan Hatzius & Kenneth D. West, 2016. "The Equilibrium Real Funds Rate: Past, Present, and Future," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 660-707, November.
    8. Olesya V. Grishchenko & Jing-zhi Huang, 2012. "Inflation risk premium: evidence from the TIPS market," Finance and Economics Discussion Series 2012-06, Board of Governors of the Federal Reserve System (US).
    9. Carolin E. Pflueger & Luis M. Viceira, 2011. "Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity," Harvard Business School Working Papers 11-094, Harvard Business School, revised Sep 2013.
    10. Iryna Kaminska & Gabriele Zinna, 2014. "Official Demand for U.S. Debt; Implications for U.S. Real Interest Rates," IMF Working Papers 14/66, International Monetary Fund.
    11. Kim, Don H. & Singleton, Kenneth J., 2012. "Term structure models and the zero bound: An empirical investigation of Japanese yields," Journal of Econometrics, Elsevier, vol. 170(1), pages 32-49.
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    Cited by:

    1. Del Negro, Marco & Giannone, Domenico & Giannoni, Marc P. & Tambalotti, Andrea, 2019. "Global trends in interest rates," Journal of International Economics, Elsevier, vol. 118(C), pages 248-262.
    2. Corneo Giacomo, 2018. "Ein Staatsfonds, der eine soziale Dividende finanziert," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 19(2), pages 94-109, July.
    3. Stefano Neri & Giuseppe Ferrero & Marco Gross, 2017. "On secular stagnation and low interest rates: demography matters," Temi di discussione (Economic working papers) 1137, Bank of Italy, Economic Research and International Relations Area.
    4. Reuven Glick, 2019. "R* and the Global Economy," GRU Working Paper Series GRU_2019_013, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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