Equilibrium Yield Curves and the Interest Rate Lower Bound

Taisuke Nakata and Hiroatsu Tanaka
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Taisuke Nakata: University of Tokyo
Hiroatsu Tanaka: Federal Reserve Board

No CARF-F-482, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: We present a calibrated DSGE model with an occasionally binding effective lower bound (ELB) constraint on yields that matches key features of the aggregate economy and the term structure of interest rates in the United States. The ELB constraint induces state dependency in term premiums by affecting macroeconomic uncertainty and interest rate sensitivity to economic activities, typically lowering the absolute size of term premiums and increasing their volatility around liftoff. The central bank's forward guidance at the ELB lowers the expected short-rate path, but its effect on term premiums depends on the risk exposure of bonds to the macroeconomy.

Pages: 74
Date: 2020-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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