scholarly journals Accounting for Low Long-Term Interest Rates: Evidence from Canada

2020 ◽  
pp. 1.000-72.000
Author(s):  
Jens H. E. Christensen ◽  
◽  
Glenn D. Rudebusch ◽  
Patrick J. Shultz ◽  
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Inflation Expectations ◽  
Real Rate ◽  
Inflation Risk ◽  
Risk Premiums ◽  
Term Structure Model ◽  
Sovereign Credit Risk ◽  
Debt Market

In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.

scholarly journals What does a term structure model imply about very long-term interest rates?

2021 ◽  
Vol 62 ◽  
pp. 202-219
Author(s):  
Anne G. Balter ◽  
Antoon Pelsser ◽  
Peter C. Schotman
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Structure Model ◽  
Term Structure Model

Term spread regressions of the rational expectations hypothesis of the term structure allowing for risk premium effects

2015 ◽  
Vol 19 (1) ◽  
Author(s):  
Efthymios Argyropoulos ◽  
Elias Tzavalis
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Rational Expectations ◽  
Time Varying ◽  
Structure Model ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Term Spread ◽  
Term Premium

AbstractThis paper suggests a new empirical methodology of testing the predictions of the term spread between long and short-term interest rates about future changes of the former allowing for term premium effects, according to the rational expectations hypothesis of the term structure. To capture the effects of a time-varying term premium on the term spread, the paper relies on an empirically attractive affine Gaussian dynamic term structure model which assumes that the term structure of interest rates is spanned by three unobserved state variables. To retrieve accurate values of these variables from interest rates series, the paper suggests a new method which can overcome the effects of measurement (or pricing) errors inherent in these series on the estimates of the model. This method is assessed by a Monte Carlo study. Ignoring these errors will lead to biased estimates of term structure models. The empirical results of the paper provide support for the suggested term structure model. They show that this model can efficiently capture the time-varying term premium effects embodied in long-term interest rates, which can explain the failures of term spread to forecast future changes in long-term rates.

scholarly journals How Important Are Inflation Expectations for the Nominal Yield Curve?

2020 ◽  
Author(s):  
Roberto Gomez-Cram ◽  
Amir Yaron
Keyword(s):  
Stochastic Volatility ◽  
Term Structure ◽  
Yield Curve ◽  
Bond Market ◽  
Inflation Expectations ◽  
Real Rate ◽  
Risk Premiums ◽  
Expected Inflation ◽  
Bond Yield ◽  
Bond Risk

Abstract Macrofinance term structure models rely too heavily on the volatility of expected inflation news as a source for variations in nominal bond yield shocks. We develop and estimate a model featuring inflation nonneutrality and preference shocks. The stochastic volatility of inflation and consumption govern bond risk premiums movements, whereas preference shocks generate fluctuations in real rates. The model accounts for key bond market features without resorting to an overly dominating expected inflation channel. The estimation shows that preference shocks are strongly negatively correlated with market distress factors and that real rate news is the dominant driver of nominal yield shocks.

scholarly journals A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt

2019 ◽  
Vol 101 (5) ◽  
pp. 933-949 ◽  
Author(s):  
Jens H. E. Christensen ◽  
Glenn D. Rudebusch
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Term Structure ◽  
Structural Breaks ◽  
Liquidity Risk ◽  
Time Varying ◽  
Real Rate ◽  
Risk Premiums ◽  
The Past ◽  
Percentage Points

The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

scholarly journals Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico

2021 ◽  
pp. 1.000-51.000
Author(s):  
Remy Beauregard ◽  
Keyword(s):  
Term Structure ◽  
The United States ◽  
Risk Premia ◽  
Inflation Expectations ◽  
Bond Markets ◽  
Bond Prices ◽  
Term Structure Model ◽  
Inflation Risk Premia ◽  
Liquidity Premia

To study inflation expectations and associated risk premia in emerging bond markets, this paper provides estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. In addition to documenting the existence of large and time-varying liquidity premia in nominal and real bond prices that are only weakly correlated, the results indicate that long-term inflation expectations in Mexico are well anchored close to the inflation target of the Bank of Mexico. Furthermore, Mexican inflation risk premia are larger and more volatile than those in Canada and the United States.

scholarly journals CANDIDE et la monnaie

2009 ◽  
Vol 52 (1) ◽  
pp. 75-103
Author(s):  
Jean-Pierre Aubry ◽  
Pierre Duguay
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Structural Equations ◽  
Reduced Form ◽  
Real Sector ◽  
Short Term ◽  
The Real ◽  
Structure Equations

Abstract In this paper we deal with the financial sector of CANDIDE 1.1. We are concerned with the determination of the short-term interest rate, the term structure equations, and the channels through which monetary policy influences the real sector. The short-term rate is determined by a straightforward application of Keynesian liquidity preference theory. A serious problem arises from the directly estimated reduced form equation, which implies that the demand for high powered money, but not the demand for actual deposits, is a stable function of income and interest rates. The structural equations imply the opposite. In the term structure equations, allowance is made for the smaller variance of the long-term rates, but insufficient explanation is given for their sharper upward trend. This leads to an overstatement of the significance of the U.S. long-term rate that must perform the explanatory role. Moreover a strong structural hierarchy, by which the long Canada rate wags the industrial rate, is imposed without prior testing. In CANDIDE two channels of monetary influence are recognized: the costs of capital and the availability of credit. They affect the business fixed investment and housing sectors. The potential of the personal consumption sector is not recognized, the wealth and real balance effects are bypassed, the credit availability proxy is incorrect, the interest rate used in the real sector is nominal rather than real, and the specification of the housing sector is dubious.

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