Equilibrium Yield Curves and the Interest Rate Lower Bound

Taisuke Nakata and Hiroatsu Tanaka
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Hiroatsu Tanaka: https://www.federalreserve.gov/econres/hiroatsu-tanaka.htm

No 2016-085, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the term structure of default-free interest rates in a sticky-price model with an occasionally binding effective lower bound (ELB) constraint on interest rates and recursive preferences. The ELB constraint induces state-dependency in the dynamics of term premiums by affecting macroeconomic uncertainty and interest-rate sensitivity to economic activities. In a model calibrated to match key features of the aggregate economy and term structure dynamics in the U.S. above and at the ELB, we find that the ELB constraint typically lowers the absolute size of term premiums at the ELB and increases their volatility around the time of liftoff. The central bank's announcement to keep the policy rate at the ELB for longer than previously expected lowers the expected short rate path, but its effect on term premiums depends on the risk exposure of bonds to the macroeconomy; while the announcement increases term premiums if bonds are a hedge against economic downturns, it decreases them otherwise.

Keywords: Effective Lower Bound; Forward Guidance; New Keynesian Model; recursive preferences; Term Premiums; Term Structure of Interest Rates; yield curves (search for similar items in EconPapers)
JEL-codes: E12 E32 E43 E44 E52 G12 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2016-10
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-85

DOI: 10.17016/FEDS.2016.085

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