Real-time estimation of the equilibrium real interest rate: Evidence from Japan

Abstract

This study demonstrates quantitatively the degree to which uncertainty originates from the revision of data inherent in the real-time estimation of the Japan's equilibrium real interest rate (ERR). It also presents some attempts to reduce that uncertainty. Results show that markedly high uncertainty results from data revision. A modified model is proposed to estimate a more credible ERR that includes lowered uncertainty with revision-free data. Furthermore, the Bank of Japan, while facing that uncertainty, has made three judgment errors because it did not recognize reliable ERR.