Natural rate chimera and bond pricing reality

Abstract

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.

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