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

• Referring the equilibrium real interest rate (ERR) in making a decision about monetary policy is significant.
• The real-time estimate from the conventional model includes considerable uncertainty because of the inconsistency.
• To reduce the uncertainties of the real-time ERR estimate, the author used the revision-free data, such as the weighted DI for TANKAN.
• The real-time ERR from the modified model shows three mistakes of the monetary policy management because of three judgment errors.

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.