Working Paper Revision

Equilibrium Yield Curves and the Interest Rate Lower Bound

Abstract: We present a calibrated DSGE model with an occasionally binding effective lower bound (ELB) constraint on the short-term nominal rate that matches key features of the macroeconomy and the term structure of interest rates in the United States. We show that the ELB constraint induces state dependency in term premiums by affecting macroeconomic uncertainty and interest rate sensitivity to economic activity, typically lowering the absolute size of term premiums and generating distinct dynamics near the ELB. The central bank's forward guidance at the ELB lowers the expected short-rate path, but increases or decreases term premiums depending on whether demand or supply shocks are dominant.

JEL Classification: E12; E32; E43; E44; E52; G12;

https://doi.org/10.17016/FEDS.2016.085r1

Bibliographic Information

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

Part of Series: Finance and Economics Discussion Series

Publication Date: 2026-09-22

Number: 2016-085r1

Note: Revision

Related Works

• Working Paper Revision (2026-09-22) : You are here.
• Working Paper Original (2016-10) : Equilibrium Yield Curves and the Interest Rate Lower Bound