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

32 Pages Posted: 14 Jun 2021

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: May, 2021

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. According to our method, the declines in both the natural real rate and long-horizon inflation expectations are clearly statistically significant. 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.

JEL Classification: E43, G12

Suggested Citation

Aronovich, Alex and Meldrum, Andrew, High-Frequency Estimates of the Natural Real Rate and Inflation Expectations (May, 2021). FEDS Working Paper No. 2021-034, Available at SSRN: https://ssrn.com/abstract=3865423 or http://dx.doi.org/10.17016/FEDS.2021.034

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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