Estimating the Natural Yield Curve in Japan Using a VAR with Common Trends

Yudai Hatayama and Yuto Iwasaki
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Yudai Hatayama: Bank of Japan
Yuto Iwasaki: Previously Bank of Japan

No 24-E-17, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper introduces a novel approach for simultaneously estimating nominal and real natural yield curves in Japan. Specifically, we employ macroeconomic variables (output gap and inflation rate) as observed variables, in addition to the nominal and real yield curves, and conduct an estimation combining the representative yield curve model, the Nelson-Siegel model (Nelson and Siegel, 1987), with a VAR with common trends (Del Negro et al., 2017). The results presented in this paper indicate that since the 1990s, both nominal and real natural yield curves have exhibited downward shifts, as a consequence of a decline in the natural rate of interest. Furthermore, both curves have flattened due to a trending decline in the term premium. The results also indicate that the extent of these changes differs between the nominal and real natural yield curves. However, it should be noted that the estimation of natural yield curves is still in the process of development. Consequently, the results should be interpreted with caution.

Keywords: Natural rate of interest; Natural yield curve; Term structure (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 (search for similar items in EconPapers)
Date: 2024-12-20
New Economics Papers: this item is included in nep-fdg and nep-mon
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