Working Paper

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

Abstract: The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

JEL Classification: E44; G01; G21; N20;

https://doi.org/10.24148/wp2017-07

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2018-11-29

Number: 2017-07

Note: The first version of this paper was published May 15, 2017.