Safety, Liquidity, and the Natural Rate of Interest - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Safety, Liquidity, and the Natural Rate of Interest

May 2017 Number 812

JEL classification: C11, C32, C54, E43, E44

Authors: Marco Del Negro, Domenico Giannone, Marc Giannoni, and Andrea Tambalotti

Why are interest rates so low in the United States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time-series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations, and a medium-scale dynamic stochastic general equilibrium (DSGE) model. We discuss the implications of this finding for the natural rate of interest.

Available only in PDF pdf

80 pages / 5.3 mb
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