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A time series model of interest rates with the effective lower bound

Benjamin K Johannsen and Elmar Mertens ()

No 715, BIS Working Papers from Bank for International Settlements

Abstract: Modeling nominal interest rates requires their effective lower bound (ELB) to be taken into account. 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 macroeconomic 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.

Keywords: shadow rate; effective lower bound; trend real rate; monetary policy shocks; bayesian time series (search for similar items in EconPapers)
JEL-codes: C32 C34 C53 E43 E47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-mac and nep-mon
Date: 2018-04
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Working Paper: A Time Series Model of Interest Rates With the Effective Lower Bound (2016) Downloads
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