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Lower-Bound Beliefs and Long-Term Interest Rates

Author

Listed:
  • Christian Grisse

    (Swiss National Bank)

  • Signe Krogstrup

    (International Monetary Fund)

  • Silvio Schumacher

    (Swiss National Bank)

Abstract

We study the transmission of changes in the believed location of the lower bound to long-term interest rates since the introduction of negative interest rate policies. The expectations hypothesis of the term structure combined with a lower bound on policy rates suggests that the transmission of policy rate changes to long-term interest rates is reduced when policy rates approach this lower bound. We show that if market participants revise downward the believed location of the lower bound, this may reduce long-term yields and increase transmission. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.

Suggested Citation

  • Christian Grisse & Signe Krogstrup & Silvio Schumacher, 2017. "Lower-Bound Beliefs and Long-Term Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 165-202, September.
  • Handle: RePEc:ijc:ijcjou:y:2017:q:3:a:5
    as

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    References listed on IDEAS

    as
    1. Kortela, Tomi, 2016. "A shadow rate model with time-varying lower bound of interest rates," Research Discussion Papers 19/2016, Bank of Finland.
    2. Grisse, Christian, 2015. "The zero lower bound and movements in the term structure of interest rates," Economics Letters, Elsevier, vol. 131(C), pages 66-69.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Marcello Pericoli & Marco Taboga, 2018. "Nearly exact Bayesian estimation of non-linear no-arbitrage term structure models," Temi di discussione (Economic working papers) 1189, Bank of Italy, Economic Research and International Relations Area.
    2. Margherita Bottero & Camelia Minoiu & José-Luis Peydró & Andrea Polo & Andrea F. Presbitero & Enrico Sette, 2019. "Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data," Working Papers 1090, Barcelona Graduate School of Economics.
    3. repec:pal:buseco:v:52:y:2017:i:1:d:10.1057_s11369-017-0031-7 is not listed on IDEAS
    4. repec:spr:sjecst:v:154:y:2018:i:1:d:10.1186_s41937-018-0022-2 is not listed on IDEAS
    5. Peter Tillmann, 2019. "Robust Monetary Policy Under Uncertainty About the Lower Bound," MAGKS Papers on Economics 201914, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. repec:arh:jrujec:v:5:y:2019:i:2:p:117-135 is not listed on IDEAS
    7. Christian Grisse & Silvio Schumacher, 2018. "Term structure dynamics at low and negative interest rates—evidence from Switzerland," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-17, December.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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