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Measuring the trend real interest rate in a data-rich environment

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  • Fu, Bowen

Abstract

The trend real interest rate is important for monetary policy decision making and understanding the secular decline in interest rates. Many papers have estimated it. However, the uncertainty surrounding these estimates is substantial. Using the US data, we construct a new measure of the trend real interest rate in a data-rich environment using a large time-varying local mean Bayesian autoregression (VAR), where the posterior median of the time-varying local mean of the real interest rate is our proposed measure. This new measure is more precisely estimated and can provide valuable information to policymakers. The width of the 95% credible intervals of our proposed estimates varies from 0.83% to 3.35%. Also, the average of the width of the 95% credible intervals is 1.43%. From our new measure, we find that the trend real interest rate has declined substantially since 1982Q2 and becomes negative after 2010Q1.

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  • Fu, Bowen, 2023. "Measuring the trend real interest rate in a data-rich environment," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:dyncon:v:147:y:2023:i:c:s016518892300012x
    DOI: 10.1016/j.jedc.2023.104606
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    Cited by:

    1. Beechey, Meredith & Österholm, Pär & Poon, Aubrey, 2023. "Estimating the US trend short-term interest rate," Finance Research Letters, Elsevier, vol. 55(PA).

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    More about this item

    Keywords

    Trend real interest rate; Equilibrium real interest rate; Large Bayesian vector autoregression; Time-varying local mean;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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