Finance

Physics

Liquidity risk

Fisher hypothesis

Macroeconomics

Debt

Monetary policy

Interest rate

Econometrics

Real interest rate

Economics

Market liquidity

Inflation (cosmology)

Zero lower bound

Theoretical physics

Monetary economics

Liquidity trap

Bond

Nominal interest rate

The Review of Economics and Statistics

The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt