Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies

Abstract

Benchmark finance and macroeconomic models deliver conflicting estimates of the natural rate and bond risk premia. This natural rate puzzle applies not only in the U.S. but across many advanced economies. We estimate a unified no-arbitrage macro-finance model with long-run trend factors to obtain a market-implied natural rate r∗. Our monthly natural rate estimates span 10 advanced economies over most of the postwar period, expanding coverage far further than previous studies, and drawing on new primary and secondary sources for bond yields and curves. This model improves the explanatory power of yield and return regressions. Most variation in yields is due to the macro trends r∗ and π∗, and not bond risk premia. Our r∗ differs from other estimates, and is typically lower, intensifying concerns about secular stagnation and the effective lower-bound.