Estimating the Interest Rate Trend in a Shadow Rate Term Structure Model

Abstract We introduce a no‐arbitrage dynamic term structure model integrated with a shadow rate and drifting trends to estimate the real interest rate trend in the United States, the United Kingdom, and Germany from 1972 to 2022. Our findings reveal declining interest rate trends across all three countries since the 1990s, underpinned by a significant co‐movement among them. We evaluate the long‐run correlations between the interest rate trends and various macro‐economic fundamentals to shed light on potential driving forces of the declining interest rate trend.