When Long-Run Trends Are Unknown: Bond Pricing Implications

Borel Ahonon () and Guillaume Roussellet
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Borel Ahonon: https://www.mcgill.ca/desautels/borel-ahonon

No 1187, Staff Reports from Federal Reserve Bank of New York

Abstract: We propose a macro-finance model in which inflation, growth, and the policy rate are driven by unobservable long-run trends and transitory cycles that investors must infer from aggregate data. Their subjective estimates of these trends, and the uncertainty surrounding them, are priced into the Treasury yield curve in a tractable way through both interest rate expectations and bond risk premia. Empirical estimates reveal an upward smooth trend in the long-run real interest rate (r-star) until the 1980s, and large investor uncertainty with confidence bands on as wide as 3.4 percentage points, contrasting with the volatile rate implied by perfect information models.

Keywords: Incomplete information; interest rate stars; Bayesian learning; treasury yields; investors; uncertainty (search for similar items in EconPapers)
JEL-codes: C58 E43 E52 G12 (search for similar items in EconPapers)
Pages: 77
Date: 2026-03-01
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-inv and nep-mac
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DOI: 10.59576/sr.1187

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