Chaptergreen2016

Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?

Jens H. E. Christensen · Glenn D. Rudebusch

83 citations0/0 files storedAdvances in econometrics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

Recent U.S. Treasury yields have been constrained to some extent by the zero lower bound (ZLB) on nominal interest rates. Therefore, we compare the performance of a standard affine Gaussian dynamic term structure model (DTSM), which ignores the ZLB, to a shadow-rate DTSM, which respects the ZLB. Near the ZLB, we find notable declines in the forecast accuracy of the standard model, while the shadow-rate model forecasts well. However, 10-year yield term premiums are broadly similar across the two models. Finally, in applying the shadow-rate model, we find no gain from estimating a slightly positive lower bound on U.S. yields.

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References

1987Parsimonious Modeling of Yield Curves 1996A YIELD‐FACTOR MODEL OF INTEREST RATES 2002Term Premia and Interest Rate Forecasts in Affine Models 2007The U.S. Treasury yield curve: 1961 to the present 2002Expectation puzzles, time-varying risk premia, and affine models of the term structure 2010A New Perspective on Gaussian Dynamic Term Structure Models 2005An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates 2011The affine arbitrage-free class of Nelson–Siegel term structure models

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2017Staying at zero with affine processes: An application to term structure modelling 2019Term Structure Analysis with Big Data: One-Step Estimation Using Bond Prices 2020Does Monetary Policy Influence the Profitability of Banks in New Zealand?2013Monetary Policy Expectations at the Zero Lower Bound 2015Monetary Policy Expectations at the Zero Lower Bound 2020

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