Finance and Economics Discussion Series (FEDS)
May 2021
High-Frequency Estimates of the Natural Real Rate and Inflation Expectations
Alex Aronovich and Andrew Meldrum
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.
Accessible materials (.zip)
Keywords: Natural real rate, nonlinear regression, term structure model
DOI: https://doi.org/10.17016/FEDS.2021.034
PDF: Full Paper
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