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

RePEc Short ID: pme274
ORCID iD: 0000-0002-8072-5970

Johannsen, Benjamin K.; Mertens, Elmar

doi:10.17016/FEDS.2016.033

Working Paper

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

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.{{p}}The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years.

Keywords: Bayesian Econometrics; Effective Lower Bound; Shadow Rate; State-Space Model; Term Structure of Interest Rates;

JEL Classification: C32; C34; C53; E43; E47;

https://doi.org/10.17016/FEDS.2016.033