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The Drivers of r*: Accounting for Treasuries' Convenience Yield

SSRN Electronic Journal
2024
  • 0
    Citations
  • 417
    Usage
  • 2
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Usage
    417
    • Abstract Views
      316
    • Downloads
      101
  • Captures
    2
  • Ratings
    • Download Rank
      535,252

Article Description

Since the Great Financial Crisis (GFC), the decline in the estimated natural rate of interest (r*) has outpaced the fall in expected potential output growth, leaving most of the decline unexplained. A growing literature highlights the importance of the premium commanded by liquid assets--often referred to as convenience yield--for the determination of the natural rate of interest and the transmission of monetary policy. This paper estimates r* using a stylized New-Keynesian model that explicitly accounts for the convenience yield on US Treasury securities. We present evidence that two slow-moving variables, the permanent component of potential output growth and the permanent component of the convenience yield on US Treasuries, almost fully account for the level of r*. We show that a rise in the convenience yield has contributed to the decline in r* since the GFC, and that accounting for the dynamics of the convenience yield increases the precision of the r* estimates.

Bibliographic Details

Balint Szoke; Francisco Vazquez-Grande; Inês Xavier

Elsevier BV

natural rate of interest; monetary policy; convenience yield

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