Finance and Economics Discussion Series (FEDS)

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November 2016 (Revised September 2026)

Equilibrium Yield Curves and the Interest Rate Lower Bound

Taisuke Nakata and Hiroatsu Tanaka

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.

Keywords: Term Structure of Interest Rates, Term Premiums, Effective Lower Bound, Forward Guidance, New Keynesian Model, Recursive Preferences

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

PDF: Full Paper

Original Paper: PDF

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Last Update: September 22, 2026