Estimating the neutral Czech government bond yield curve

Adam Kučera, Milan Szabo

This article presents the neutral Czech government bond yield curve and the method used to construct it. The neutral yield curve shows the Czech government bond yields at which the economy is in equilibrium, inflation is at the target, risk premia are at their long-term average levels and investors do not expect any future deviation from this state. The method presented in this article allows us to identify the factors responsible for the deviation of market yields from neutral yields. By applying the method to data for the period 2003–2018, we show that the Czech government bond yield curve has been well below its neutral level since 2009. At the start of the period under review, this deviation was caused mainly by a negative cycle in real rates due to accommodative monetary policy. In the period that followed, higher demand for Czech government bonds – caused mainly by unconventional monetary policy instruments – contributed to the deviation. At the end of the period under review, a low term risk premium was the main cause of the persisting deviation.

Issued: May 2019

Download: Thematic article on financial stability 3/2019 (pdf, 326 kB)