Measuring Equilibrium Real Interest Rates: What Can We Learn from Yields on Indexed Bonds?

Abstract

What does the level of the real interest rates tell us about where the economy, or one's portfolio, is headed? The answer to this question depends on one's estimate of the "equilibrium" value of real interest rates, a measure that is unfortunately not directly observed in the market place. In this paper, I provide a brief overview of some of the existing approaches to defining and measuring equilibrium real rates and introduce a novel method based on yields on the U.S. Treasury's inflation-indexed securities (TIIS). I discuss a simple framework for analyzing TIIS yields and illustrate how to use them to gauge the stance of monetary policy and overall economic prospects.