Natural rate chimera and bond pricing reality

Wolfgang Lemke (European Central Bank)

15 mars 2022

BDF Paris

Séminaire Banque de France


We build a novel macro-finance model that combines a semi-structural macroeconomic module with arbitrage-free yield-curve dynamics. We estimate it for the United States and the euro area using a Bayesian approach and jointly infer the real equilibrium interest rate (r∗), trend inflation (π ∗), and term premia. Similar to Bauer and Rudebusch (2020, AER), π ∗ and r ∗ constitute a time-varying trend for the nominal short-term rate in our model, rendering estimated term premia more stable than standard yield curve models operating with timeinvariant means. In line with the literature, our r ∗ estimates display a distinct decline over the last four decades.


Natural rate of interest,; r∗; equilibrium real rate; arbitrage-free Nelson-Siegel term structure model,; term premia; unobserved components; Bayesian estimation;

Codes JEL

  • C11: Bayesian Analysis: General
  • C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
  • E43: Interest Rates: Determination, Term Structure, and Effects
  • G12: Asset Pricing • Trading Volume • Bond Interest Rates
  • E44: Financial Markets and the Macroeconomy
  • E52: Monetary Policy

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