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Natural rate chimera and bond pricing reality

Claus Brand, Gavin Goy and Wolfgang Lemke

No 2612, Working Paper Series from European Central Bank

Abstract: We build a novel macro-finance model that combines a semi-structural macroeconomic module with arbitrage-free yield-curve dynamics. We estimate it for the United States and the euro area using a Bayesian approach and jointly infer the real equilibrium interest rate (r*), trend inflation (π*), and term premia. Similar to Bauer and Rudebusch (2020, AER), π* and r* constitute a time-varying trend for the nominal short-term rate in our model, rendering estimated term premia more stable than standard yield curve models operating with time-invariant means. In line with the literature, our r* estimates display a distinct decline over the last four decades. JEL Classification: C11, C32, E43, G12, E44, E52

Keywords: arbitrage-free Nelson-Siegel term structure model; Bayesian estimation; equilibrium real rate; natural rate of interest; r*; term premia; unobserved components (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-eec, nep-mac and nep-opm
Note: 92649
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Natural rate chimera and bond pricing reality (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212612

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