A Time Series Model of Interest Rates With the Effective Lower Bound

Benjamin K. Johannsen · Elmar Mertens

69 citations0/0 files storedFinance and Economics Discussion Series

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Economic theories and models

Abstract

Modeling interest rates over samples that include the Great Recession requires taking stock of the effective lower bound (ELB) on nominal interest rates. We propose a flexible time– series approach which includes a “shadow rate”—a notional rate that is less than the ELB during the period in which the bound is binding—without imposing no–arbitrage assumptions. The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years.

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