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Federal Reserve Bank of San Francisco
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A Regime-Switching Model of the Yield Curve at the Zero Bound
Jens H. E. Christensen

This paper presents a regime-switching model of the yield curve with two states: a normal state and a zero-bound state for the case when the monetary policy target rate is stuck at the nominal zero bound, as the U.S. economy has been since December 2008. The model delivers estimates of the time-varying probability of exiting the zero-bound state and can be applied to generate outcome-contingent forecasts useful for portfolio stress tests. The results show that the probability of remaining in the zero-bound state has trended upward since 2009, with notable upticks following Federal Reserve decisions to provide further monetary stimulus, whether through asset purchases or forward guidance.

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Jens H. E. Christensen, A Regime-Switching Model of the Yield Curve at the Zero Bound, Federal Reserve Bank of San Francisco, Working Paper Series 2013-34, 2013, revised 29 Apr 2015.
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Keywords: arbitrage-free Nelson-Siegel model; monetary policy; liftoff probability
DOI: 10.24148/wp2013-34
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