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Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies

In: NBER International Seminar on Macroeconomics 2023

Author

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

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. Global components of unexpected bond returns are influential, while the local components of natural rates are large. Our r* estimates covary with growth and demographic variables in a manner consistent with theory and previous findings.
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Suggested Citation

  • Josh Davis & Cristian Fuenzalida & Leon Huetsch & Benjamin Mills & Alan M. Taylor, 2023. "Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies," NBER Chapters, in: NBER International Seminar on Macroeconomics 2023, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:15039
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    Cited by:

    1. Rodolfo G. Campos & Jesús Fernández-Villaverde & Galo Nuño Barrau & Peter Paz, 2024. "Navigating by falling stars: monetary policy with fiscally driven natural rates," BIS Working Papers 1172, Bank for International Settlements.
    2. Billi, Roberto & Galí, Jordi & Nakov, Anton, 2024. "Optimal monetary policy with r∗<0," Journal of Monetary Economics, Elsevier, vol. 142(C).

    More about this item

    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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