The Natural Rate Puzzle : Global Macro Trends and the Market-Implied r*
Josh Davis, Cristian Fuenzalida, Alan M. Taylor
Benchmark finance models deliver estimates of bond risk premia based on components of Treasury bond yields. Benchmark macroeconomic models deliver estimates of the natural rate of interest based on growth, inflation, and other macro factors. But estimates of the natural rate implied by the former are wildly inconsistent with those of the latter; and estimates of risk premia implied by the latter are wildly inconsistent with those of the former. This is the natural rate puzzle, and we show that it applies not only in the United States but also across several advanced economies. A unified model should not fail such consistency tests. We estimate a unified macro-finance model with long-run trend factors which delivers paths for a market-implied natural rate r* consistent with inflation expectations π* and bond risk premia. These paths are plausible and our factors improve the explanatory power of yield and return regressions. Trading strategies based on signals incorporating both r* and π* trends outperform both yield- only strategies like level and slope and strategies which only add trend inflation. The estimates from our unified model satisfy consistency and deliver a resolution to the puzzle. They show that most of the variation in yields has come from shifts in r* and π*, not from bond risk premia. Our market-implied natural rate differs from consensus estimates, and is typically lower, intensifying concerns about secular stagnation and proximity to the effective lower-bound on monetary policy in advanced economies
Year of publication: |
December 2019
|
---|---|
Authors: | Davis, Josh |
Other Persons: | Fuenzalida, Cristian (contributor) ; Taylor, Alan M. (contributor) |
Institutions: | National Bureau of Economic Research (contributor) |
Publisher: |
2019: Cambridge, Mass : National Bureau of Economic Research |
Saved in:
freely available
Extent: | 1 Online-Ressource illustrations (black and white) |
---|---|
Series: | NBER working paper series ; no. w26560 |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | System requirements: Adobe [Acrobat] Reader required for PDF files Mode of access: World Wide Web Hardcopy version available to institutional subscribers |
Other identifiers: | 10.3386/w26560 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012480504
Saved in favorites
Similar items by person
-
Davis, Joshua M., (2023)
-
The natural rate puzzle : global macro trends and the market-implied r*
Davis, Joshua M., (2019)
-
The Natural Rate Puzzle : Global Macro Trends and the Market-Implied R
Davis, Josh, (2019)
- More ...