A DSGE Perspective on Safety, Liquidity, and Low Interest Rates

Del Negro, Marco; Giannone, Domenico; Giannoni, Marc; Gupta, Abhi; Li, Pearl; Tambalotti, Andrea

Discussion Paper

A DSGE Perspective on Safety, Liquidity, and Low Interest Rates

Abstract: The preceding two posts in this series documented that interest rates on safe and liquid assets, such as U.S. Treasury securities, have declined significantly in the past twenty years. Of course, short-term interest rates in the United States are under the control of the Federal Reserve, at least in nominal terms. So it is legitimate to ask, To what extent is this decline driven by the Federal Reserve’s interest rate policy? This post addresses this question by coupling the results presented in the previous post with those obtained from an estimated dynamic stochastic general equilibrium (DSGE) model.

Keywords: r star; convenience yields; liquidity; safety;

JEL Classification: E2; E5;