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 Taylor

No 31787, NBER Working Papers from National Bureau of Economic Research, Inc

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. Global components of unexpected bond returns are influential, while the local components of natural rates are large. Our r* estimates covary with growth and demographic variables in a manner consistent with theory and previous findings.

JEL-codes: C13 C32 E43 E44 E47 G12 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-ifn
Note: EFG IFM ME
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Published as Josh Davis & Cristian Fuenzalida & Leon Huetsch & Benjamin Mills & Alan M. Taylor, 2024. "Global natural rates in the long run: Postwar macro trends and the market-implied in 10 advanced economies," Journal of International Economics, .
Published as 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, Alan M. Taylor. in NBER International Seminar on Macroeconomics 2023 , Frankel and Rey. 2024

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