Global natural rates in the long run: Postwar macro trends and the market-implied r∗ in 10 advanced economies

Josh Davis, Cristian Fuenzalida, Leon Huetsch, Benjamin Mills and Alan M. Taylor

Journal of International Economics, 2024, vol. 149, issue C

Abstract: Benchmark finance and macroeconomic models appear to deliver conflicting estimates of the natural rate and bond risk premia. This natural rate puzzle applies not only in the U.S. but across many advanced economies. We use a unified no-arbitrage macro-finance model with two trend factors to estimate the natural rate r∗ for 10 advanced economies. We cover a longer and wider sample than previous studies and draw on new sources to construct yield curves and excess returns. The two-trend model improves the explanatory power of yield regressions and return forecasts. Most variation in yields is due to the macro trends r∗ and π∗, and not bond risk premia, which are flatter than previous estimates. Our r∗ estimates covary with growth and demographic variables in a manner consistent with theory and previous findings.

Keywords: Bond risk premia; Natural rate of interest; Inflation expectations; Term structure; Affine models (search for similar items in EconPapers)
JEL-codes: C13 C32 E43 E44 E47 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:149:y:2024:i:c:s0022199624000436

DOI: 10.1016/j.jinteco.2024.103919

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