The Zero Lower Bound Remains a Medium-Term Risk

Cho, Sophia; Mertens, Thomas M.; Williams, John C.

Journal Article

The Zero Lower Bound Remains a Medium-Term Risk

Abstract: Financial markets—specifically derivatives—contain information about the range of probable future short-term interest rates. The information from this statistical distribution can help measure the perceived risk of interest rates returning to the zero lower bound in the future. The risk varies over time, driven mainly by the expected level of interest rates. At longer forecast horizons, a higher risk of returning to the lower bound primarily reflects a higher amount of uncertainty. Currently, the perceived risk appears slim over the next few years but is significant at longer horizons.