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Global natural rates in the long run: Postwar macro trends and the market-implied r∗ in 10 advanced economies

Author

Listed:
  • Davis, Josh
  • Fuenzalida, Cristian
  • Huetsch, Leon
  • Mills, Benjamin
  • Taylor, Alan M.

Abstract

Benchmark finance and macroeconomic models appear to deliver conflicting estimates of the natural rate and bond risk premia. This natural rate puzzle applies not only in the U.S. but across many advanced economies. We use a unified no-arbitrage macro-finance model with two trend factors to estimate the natural rate r∗ for 10 advanced economies. We cover a longer and wider sample than previous studies and draw on new sources to construct yield curves and excess returns. The two-trend model improves the explanatory power of yield regressions and return forecasts. Most variation in yields is due to the macro trends r∗ and π∗, and not bond risk premia, which are flatter than previous estimates. Our r∗ estimates covary with growth and demographic variables in a manner consistent with theory and previous findings.

Suggested Citation

  • Davis, Josh & Fuenzalida, Cristian & Huetsch, Leon & Mills, Benjamin & Taylor, Alan M., 2024. "Global natural rates in the long run: Postwar macro trends and the market-implied r∗ in 10 advanced economies," Journal of International Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:inecon:v:149:y:2024:i:c:s0022199624000436
    DOI: 10.1016/j.jinteco.2024.103919
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    Keywords

    Bond risk premia; Natural rate of interest; Inflation expectations; Term structure; Affine models;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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