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;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2016-04-04

Number: 2016-033

Pages: 46 pages