Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Christian Grisse
Author-Name-First: Christian
Author-Name-Last: Grisse
Author-Person: pgr250
Title: Lower bound uncertainty and long-term interest rates
Abstract: Nominal interest rates are constrained by an effective lower bound, but the level of the lower bound is uncertain. This paper uses a simple shadow rate term structure model to study how lower bound uncertainty affects long-term interest rates. The main result is that a decline in lower bound uncertainty, in the sense of a mean-preserving contraction of the lower bound distribution, is associated with a drop in expected future short rates. The effect on the variance of future short rates, and hence the term premium, is ambiguous. A calibration to Canadian data suggests that a decline in lower bound uncertainty is associated with a modest drop in long-term interest rates.
Length: 23 pages
Creation-Date: 2020
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2020/working_paper_2020_14
File-Format: text/html
Number: 2020-14
Classification-JEL: E43, E52
Keywords: Monetary policy, negative interest rates, lower bound, uncertainty, term structure
Handle: RePEc:snb:snbwpa:2020-14