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

Jens H. E. Christensen, Glenn D. Rudebusch
2017 Federal Reserve Bank of San Francisco, Working Paper Series  
Some have argued that Treasury yields have been pushed down by lower longer-run expectations of the safe, short-term real interest rate-that is, by a drop in the so-called equilibrium or natural rate of interest. We examine this possibility using an arbitrage-free dynamic term structure model estimated directly on prices of individual inflation-indexed bonds with adjustments for real term and liquidity risk premiums. We find that a lower expected short real rate has accounted for about 2
more » ... age points of the general downtrend in yields over the past two decades and that this situation seems unlikely to reverse quickly. JEL Classification: C32, E43, E52, G12
doi:10.24148/wp2017-07 fatcat:cam27yvcyje4tekgmaylpqlpsq