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Below the zero lower bound: a shadow-rate term structure model for the euro area

Author

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  • Lemke, Wolfgang
  • Vladu, Andreea Liliana

Abstract

We propose a shadow-rate term structure model for the euro area yield curve from 1999 to mid-2015, when bond yields had turned negative at various maturities. Yields in the model are constrained by a lower bound, but - as a special feature of our specification - the bound is allowed to change over time. We estimate that it has first ranged marginally above zero, but has decreased to -11 bps in September 2014. We derive the impact of a changing lower bound on the yield curve and interpret the impact of the September 2014 ECB rate cut from this perspective. Our model matches survey forecasts of short rates and the decline in yield volatility during the low-rate period better than a benchmark affine model. We estimate that since mid-2012 the horizon when short rates are expected to exceed 25 bps again has ranged between 18 and 62 months. JEL Classification: C32, E43, E52

Suggested Citation

  • Lemke, Wolfgang & Vladu, Andreea Liliana, 2017. "Below the zero lower bound: a shadow-rate term structure model for the euro area," Working Paper Series 1991, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20171991
    Note: 1085812
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    References listed on IDEAS

    as
    1. Jens H. E. Christensen & Glenn D. Rudebusch, 2016. "Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 75-125, Emerald Group Publishing Limited.
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    6. Andreasen, Martin M & Meldrum, Andrew, 2015. "Dynamic term structure models: the best way to enforce the zero lower bound in the United States," Bank of England working papers 550, Bank of England.
    7. Michael D. Bauer & Glenn D. Rudebusch, 2016. "Monetary Policy Expectations at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(7), pages 1439-1465, October.
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    More about this item

    Keywords

    lower bound; monetary policy expectations; nonlinear state space model; term structure of interest rates;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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