Measuring the Trend Real Interest Rate in a Data-Rich Environment

The trend real interest rate is important for monetary policy decision making and understanding the secular decline in interest rates. Many papers have estimated it. However, the uncertainty surrounding these estimates is substantial. In this paper, using the US data, we construct a new measure of the trend real interest rate in a data-rich environment using a large time-varying local mean Bayesian autoregression (VAR). This new measure is more precisely estimated and can provide valuable information to policymakers. The ranges of the 95% credible intervals of our proposed estimates are from 0.70% to 1.75%. From our new measure, we find that the trend real interest rate has declined substantially since 1984 and becomes negative after 2012