Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?

Jens Christensen and Glenn Rudebusch

No 2013-39, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Recent U.S. Treasury yields have been constrained to some extent by the zero lower bound (ZLB) on nominal interest rates. In modeling these yields, we compare the performance of a standard affine Gaussian dynamic term structure model (DTSM), which ignores the ZLB, and a shadow-rate DTSM, which respects the ZLB. We find that the standard affine model is likely to exhibit declines in fit and forecast performance with very low interest rates. In contrast, the shadow-rate model mitigates ZLB problems significantly and we document superior performance for this model class in the most recent period.

Keywords: term structure modeling; zero lower bound; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 G12 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-12-17
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Related works:
Chapter: Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution? (2016)
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DOI: 10.24148/wp2013-39

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