Report

Safety, liquidity, and the natural rate of interest


Abstract: Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time-series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations, and a medium-scale dynamic stochastic general equilibrium (DSGE) model. We discuss the implications of this finding for the natural rate of interest.

Keywords: natural rate of interest; r*; DSGE models; liquidity; safety; convenience yield;

JEL Classification: C11; C32; C54; E43; E44;

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Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2017-05-11

Number: 812