Natural Rate Chimera and Bond Pricing Reality

47 Pages Posted: 4 Feb 2020

See all articles by Claus Brand

Claus Brand

European Central Bank (ECB)

Gavin Goy

De Nederlandsche Bank

Wolfgang Lemke

European Central Bank

Multiple version iconThere are 2 versions of this paper

Date Written: January 16, 2020


Incorporating arbitrage-free term-structure dynamics into a semi-structural macro-model, we jointly estimate the real equilibrium interest rate (r), trend inflation, and term premia for the United States and the euro area, using a Bayesian approach. The natural real rate and trend inflation are cornerstones determining equilibrium yields across maturities and macroeconomic trends. Taking into account the secular decline in equilibrium rates, term premia exhibit cyclical behavior over the business cycle, rather than the commonly reported trend. Our estimates suggest a fall in r from a pre-crisis level of about 3% to around zero, but estimates are subject to sizeable uncertainty. Including survey expectations can lift r estimates for recent quarters by a margin.

Keywords: natural rate of interest, r, equilibrium real rate, arbitrage-free Nelson-Siegel term structure model, term premia, unobserved components, Bayesian estimation

JEL Classification: C11, C32, E43, G12, E44, E52

Suggested Citation

Brand, Claus and Goy, Gavin and Lemke, Wolfgang, Natural Rate Chimera and Bond Pricing Reality (January 16, 2020). De Nederlandsche Bank Working Paper No. 666, January 2020, Available at SSRN: or

Claus Brand (Contact Author)

European Central Bank (ECB) ( email )

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D-60311 Frankfurt am Main
+0049 69 13440 (Phone)
+0044 69 1344 6000 (Fax)

Gavin Goy

De Nederlandsche Bank ( email )

Westeinde 1
1017 ZN Amsterdam

HOME PAGE: http://

Wolfgang Lemke

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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