The Unassuming Economist

From a paper by Claus Brand, Gavin Goy, and Wolfgang Lemke:

“Using a novel macro-finance model we infer jointly the equilibrium real interest rate r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*. Accounting for the secular decline in interest rates renders term premia more stable than those based on stationary yield curve models.”