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
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
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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:bis:biswps:715
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