A Time‐Series Model of Interest Rates with the Effective Lower Bound

Benjamin K. Johannsen and Elmar Mertens

Journal of Money, Credit and Banking, 2021, vol. 53, issue 5, 1005-1046

Abstract: Modeling nominal interest rates requires to take into account the effective lower bound (ELB). We propose a flexible time‐series approach that includes a “shadow rate”—a notional rate identical to the actual nominal rate except when the ELB binds . We apply this approach to a trend‐cycle decomposition of interest rates and macro‐economic variables that generates competitive interest‐rate forecasts. Our estimates of the real‐rate trend have edged down somewhat in recent decades, but not significantly so. We identify monetary policy shocks from shadow‐rate surprises and find that they were particularly effective at stimulating economic activity during the ELB period.

Date: 2021
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Citations: View citations in EconPapers (24)

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https://doi.org/10.1111/jmcb.12771

Related works:
Working Paper: A time series model of interest rates with the effective lower bound (2018)
Working Paper: A Time Series Model of Interest Rates With the Effective Lower Bound (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:53:y:2021:i:5:p:1005-1046

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