Safety, Liquidity, and the Natural Rate of Interest
82 Pages Posted: 12 May 2017
Date Written: 2017-05-11
Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time-series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations, and a medium-scale dynamic stochastic general equilibrium (DSGE) model. We discuss the implications of this finding for the natural rate of interest.
Keywords: natural rate of interest, r*, DSGE models, liquidity, safety, convenience yield
JEL Classification: C11, C32, C54, E43, E44
Suggested Citation: Suggested Citation