Measuring Equilibrium Real Interest Rates: What Can We Learn from Yields on Indexed Bonds?

Antúlio N. Bomfim

42 citations0/0 files storedFinance and Economics Discussion Series

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Economic theories and models

Abstract

What does the level of the real interest rates tell us about where the economy, or one's portfolio, is headed? The answer to this question depends on one's estimate of the "equilibrium" value of real interest rates, a measure that is unfortunately not directly observed in the market place. In this paper, I provide a brief overview of some of the existing approaches to defining and measuring equilibrium real rates and introduce a novel method based on yields on the U.S. Treasury's inflation-indexed securities (TIIS). I discuss a simple framework for analyzing TIIS yields and illustrate how to use them to gauge the stance of monetary policy and overall economic prospects.

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References

1992Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation 1989The federal funds rate and the channels of monetary transmission 1998Predicting U.S. Recessions: Financial Variables as Leading Indicators 1979The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure 1990The Federal Funds Rate and the Channels of Monetary Transnission 1994Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994 1983Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates 1994Estimating and Interpreting Forward Interest Rates

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