Lower bound uncertainty and long-term interest rates

Christian Grisse

No 2020-14, Working Papers from Swiss National Bank

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. The main result is that a decline in lower bound uncertainty, in the sense of a mean-preserving contraction of the lower bound distribution, is associated with a drop in expected future short rates. The effect on the variance of future 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 long-term interest rates.

Keywords: Monetary policy; negative interest rates; lower bound; uncertainty; term structure (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2020-14

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