What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices

Thomas M. Mertens and John Williams

American Economic Review, 2021, vol. 111, issue 8, 2473-2505

Abstract: This paper analyzes the effects of the lower bound for interest rates on the distributions of inflation and interest rates. In a New Keynesian model with a lower bound, two equilibria emerge: policy is mostly unconstrained in the "target equilibrium," whereas policy is mostly constrained in the "liquidity trap equilibrium." Using options data on interest rates and inflation, we find forecast densities consistent with the target equilibrium and find no evidence in favor of the liquidity trap equilibrium. The lower bound has a sizable effect on the distribution of interest rates, but its impact on inflation is relatively modest.

JEL-codes: E12 E23 E31 E43 E52 G13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices (2020)
Working Paper: What to expect from the lower bound on interest rates: evidence from derivatives prices (2018)
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DOI: 10.1257/aer.20181461

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