High-Frequency Estimates of the Natural Real Rate and Inflation Expectations

29 Pages Posted: 30 Nov 2020

See all articles by Alex Aronovich

Alex Aronovich

Board of Governors of the Federal Reserve System

Andrew Meldrum

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 28, 2020

Abstract

We propose a new method of estimating the natural real rate and long-horizon inflation expectations, using nonlinear regressions of survey-based measures of short-term nominal interest rates and inflation expectations on U.S. Treasury yields. We find that the natural real rate was relatively stable during the 1990s and early 2000s, but declined steadily after the global financial crisis, before dropping more sharply to around 0 percent during the recent COVID-19 pandemic. Long-horizon inflation expectations declined steadily during the 1990s and have since been relatively stable at close to 2 percent. Our estimates are available at whatever frequency we observe bond yields, making them ideal for intraday event-study analysis---for example, we show that the natural real rate and long-horizon inflation expectations are not affected by temporary shocks to the stance of monetary policy.

Keywords: Natural real rate, nonlinear regression, term structure model

JEL Classification: E43, G12

Suggested Citation

Aronovich, Alex and Meldrum, Andrew, High-Frequency Estimates of the Natural Real Rate and Inflation Expectations (November 28, 2020). Available at SSRN: https://ssrn.com/abstract=3739072 or http://dx.doi.org/10.2139/ssrn.3739072

Alex Aronovich (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrew Meldrum

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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