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Working Paper
Market-Based Estimates of the Natural Real Rate: Evidence from Latin American Bond Markets
We provide market-based estimates of the natural real rate, that is, the steady-state short-term real interest rate, for Brazil, Chile, and Mexico. Our approach uses a dynamic term structure finance model estimated directly on the prices of individual inflation indexed bonds with adjustments for bond-specific liquidity and real term premia. First, we find that inflation-indexed bond liquidity premia in all three countries are sizable with significant variation. Second, we find large differences in their estimated equilibrium real rates: Brazil’s is large and volatile, Mexico’s is stable ...
Working Paper
A Post-Pandemic New Normal for Interest Rates in Emerging Bond Markets? Evidence from Chile
Before the COVID-19 pandemic, researchers intensely debated the extent of the decline in the steady-state short-term real interest rate—the so-called equilibrium or natural rate of interest. Given the recent sharp increase in interest rates, we revisit this question in an emerging bond market context and offer a Chilean perspective using a dynamic term structure finance model estimated directly on the prices of individual Chilean inflation indexed bonds with adjustments for bond-specific liquidity risk and real term premia. We estimate that the equilibrium real rate in Chile fell about 2 ...
Working Paper
The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds
The so-called equilibrium or natural rate of interest, widely known as r*t, is a key variable used to judge the stance of monetary policy. We offer a novel euro-area estimate based on a dynamic term structure model estimated directly on the prices of bonds with cash flows indexed to the euro-area harmonized index of consumer prices with adjustments for bond-specific risk and real term premia. Despite a recent increase, our estimate indicates that the natural rate in the euro area has fallen about 2 percentage points on net since 2002 and remains negative at the end of our sample. We also ...