Finance and Economics Discussion Series (FEDS)

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April 2016

Time Series Model of Interest Rates With the Effective Lower Bound

Benjamin K. Johannsen and 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.

Accessible materials (.zip)

Keywords: Bayesian Econometrics, Effective Lower Bound, Shadow Rate, State-Space Model, Term Structure of Interest Rates

DOI: http://dx.doi.org/10.17016/FEDS.2016.033

PDF: Full Paper

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Last Update: June 19, 2020