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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
A Time Series Model of Interest Rates With the Effective Lower Bound
Benjamin K. Johannsen
Elmar Mertens
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.

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


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Benjamin K. Johannsen & Elmar Mertens, A Time Series Model of Interest Rates With the Effective Lower Bound, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-033, 04 Apr 2016.
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Keywords: Bayesian Econometrics ; Effective Lower Bound ; Shadow Rate ; State-Space Model ; Term Structure of Interest Rates
DOI: 10.17016/FEDS.2016.033
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