Lower Bound Uncertainty and Long‐Term Interest Rates

Christian Grisse

Journal of Money, Credit and Banking, 2023, vol. 55, issue 2-3, 619-634

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. A decline in lower bound uncertainty, in the sense of a mean‐preserving contraction, is associated with a drop in expected short rates. The effect on the variance of 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 interest rates.

Date: 2023
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https://doi.org/10.1111/jmcb.12890

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Working Paper: Lower bound uncertainty and long-term interest rates (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:55:y:2023:i:2-3:p:619-634

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