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

Jens H. E. Christensen and Glenn Rudebusch
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Jens H. E. Christensen: Federal Reserve Bank of San Francisco

The Review of Economics and Statistics, 2019, vol. 101, issue 5, 933-949

Abstract: The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

Date: 2019
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Working Paper: A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt (2018)
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