Equilibrium Interest Rate and the Yield Curve in a Low Interest Rate Environment

Hibiki Ichiue () and Yoichi Ueno
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Yoichi Ueno: Bank of Japan

No 07-E-18, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Equilibrium nominal interest rates are useful indicators for both monetary policy authorities and market players. However, there are few studies which estimate Japan's equilibrium rate because of its persistent low interest rate. We overcome this challenge by using survey forecasts of interest rates and macroeconomic variables to estimate a two-factor yield curve model, which takes the bound of zero interest into account. We found that: 1) the equilibrium rate is roughly approximated with the long-run expected nominal output growth rate; 2) the Bank of Japan's commitments successfully lowered yields even at zero interest; and 3) the term premium of 10-year yield has had a downtrend since 2004.

Keywords: Equilibrium interest rate; Black's model of interest rates as options; Monetary policy; Macro-finance; Survey data (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 G12 (search for similar items in EconPapers)
Date: 2007-07
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Citations: View citations in EconPapers (44)

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