Estimating the Natural Yield Curve in Japan Using a VAR with Common Trends
December 20, 2024
Yudai Hatayama*1
Yuto Iwasaki*2
Abstract
This paper introduces a novel approach for simultaneously estimating nominal and real natural yield curves in Japan. Specifically, we employ macroeconomic variables (output gap and inflation rate) as observed variables, in addition to the nominal and real yield curves, and conduct an estimation combining the representative yield curve model, the Nelson-Siegel model (Nelson and Siegel, 1987), with a VAR with common trends (Del Negro et al., 2017). The results presented in this paper indicate that since the 1990s, both nominal and real natural yield curves have exhibited downward shifts, as a consequence of a decline in the natural rate of interest. Furthermore, both curves have flattened due to a trending decline in the term premium. The results also indicate that the extent of these changes differs between the nominal and real natural yield curves. However, it should be noted that the estimation of natural yield curves is still in the process of development. Consequently, the results should be interpreted with caution.
- JEL classification
- C32, E43, E52
- Keywords
- Natural rate of interest, Natural yield curve, Term structure
In writing this paper, we received valuable comments from Wataru Hirata, Sohei Kaihatsu, Kazushige Kamiyama, Mitsuhiro Osada, Yoichi Ueno, and BOJ staff members. The authors thank Rin Ichimaru and Anna Tsuda for their excellent research assistance. However, any errors remaining in this paper are those of the authors themselves. Additionally, the views expressed herein are those of the authors and do not necessarily reflect the official views of the Bank of Japan.
- *1International Department
E-mail : yuudai.hatayama@boj.or.jp - *2Previously in International Department
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