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.

© 2019 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
2019
The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Supplementary data

Supplemental appendix 1
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Supplemental appendix 2
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