On the estimation of the natural yield curve

This study discusses the estimation methodology of the natural yield curve, which is an extension of the natural rate of interest defined at a short-term interest rate to that defined for all maturities on a yield curve. To identify information about the latent factors forming the natural rate curve, the original estimation framework proposed by Imakubo et al. (2018), employs the pre-estimated potential growth rate, assuming that a change in the factors depends on a change in the potential growth rate. In contrast, this study examines an alternative approach that specifies that the levels of the factors depend on the potential growth rate. In an empirical analysis with recursive data updating, the differences in the resulting natural yield curve and its updated patterns between the two approaches are investigated.