Estimating the natural rate of interest in a macro-finance yield curve model

Claus Brand, Gavin Goy and Wolfgang Lemke

No 3160, Working Paper Series from European Central Bank

Abstract: Using a novel macro-finance model we infer jointly the equilibrium real interest rate r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*. Accounting for the secular decline in interest rates renders term premia more stable than those based on stationary yield curve models. A previous version of this paper by the same authors entitled “Natural rate chimera and bond pricing reality” has been published as ECB Working Paper No 2612. JEL Classification: E43, C32, E52, C11, G12

Keywords: arbitrage-free Nelson-Siegel term structure model; Bayesian estimation; equilibrium real rate; natural interest rate; term premia (search for similar items in EconPapers)
Date: 2025-12
New Economics Papers: this item is included in nep-fdg and nep-mon
Note: 92649
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253160

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