Working Papers

2017-07 | May 2017


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


Researchers have debated the extent of the decline in the steady-state short-term real interest rate—that is, in the so-called equilibrium or natural rate of interest. We examine this issue using a dynamic term structure finance model estimated directly on the prices of individual inflation-indexed bonds with adjustments for real term and liquidity risk premiums. Our methodology avoids two pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and potential misspecification of output and inflation dynamics. We estimate that the equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

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