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Zero Lower Bound and Indicator Properties of Interest Rate Spreads

Author

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  • Jari Hännikäinen

    (School of Management, University of Tampere)

Abstract

This paper examines the predictive power of interest rate spreads when the zero lower bound restriction for monetary policy is binding. We show that this restriction has a major e ect on the predictive content of some interest rate spreads. Most importantly, we nd that the term spread outperforms the AR benchmark in real-time forecasting exercise when the short-term rate is at the zero lower bound, but not otherwise. On the other hand, our results indicate that the di erence between the 30-year mortgage rate and ten-year Treasury bond rate is a robust predictor of future economic activity.

Suggested Citation

  • Jari Hännikäinen, 2013. "Zero Lower Bound and Indicator Properties of Interest Rate Spreads," Working Papers 1390, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:1390
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    File URL: http://urn.fi/URN:ISBN:978-951-44-9246-4
    File Function: First version, 2013
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    More about this item

    Keywords

    business fl uctuations; forecasting; interest rate spreads; monetary policy; zero lower bound;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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