For several decades, long-term interest rates around the world trended down before reversing some of that decline in the past few years. We decompose these changes using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a novel perspective on this issue because of its established indexed debt market, modest distortions from monetary quantitative easing and tightening or the zero lower bound, and an absence of sovereign credit risk. From 1996 to 2021, we find that the steady-state real interest rate fell by more than 4 percentage points, long-term inflation expectations edged down modestly, and real bond and inflation risk premiums varied over time but showed little longer-run trend. The subsequent reversal in long-term interest rates is mostly driven by a sharp increase in the equilibrium real rate.
Suggested citation:
Christensen, Jens H. E., Glenn D. Rudebusch, and Patrick J. Shultz. 2023. “Accounting for Low Long-Term Interest Rates: Evidence from Canada.” Federal Reserve Bank of San Francisco Working Paper 2020-35. https://doi.org/10.24148/wp2020-35