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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 2doi:10.24148/wp2017-07 fatcat:cam27yvcyje4tekgmaylpqlpsq