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A Regime-Switching Model of the Yield Curve at the Zero Bound

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  • Christensen, Jens H. E.

    () (Federal Reserve Bank of San Francisco)

Abstract

This paper presents a regime-switching model of the yield curve with two states: a normal state and a zero-bound state for the case when the monetary policy target rate is stuck at the nominal zero bound, as the U.S. economy has been since December 2008. The model delivers estimates of the time-varying probability of exiting the zero-bound state and can be applied to generate outcome-contingent forecasts useful for portfolio stress tests. The results show that the probability of remaining in the zero-bound state has trended upward since 2009, with notable upticks following Federal Reserve decisions to provide further monetary stimulus, whether through asset purchases or forward guidance.

Suggested Citation

  • Christensen, Jens H. E., 2013. "A Regime-Switching Model of the Yield Curve at the Zero Bound," Working Paper Series 2013-34, Federal Reserve Bank of San Francisco, revised 29 Apr 2015.
  • Handle: RePEc:fip:fedfwp:2013-34
    DOI: 10.24148/wp2013-34
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    References listed on IDEAS

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    More about this item

    Keywords

    arbitrage-free Nelson-Siegel model; monetary policy; liftoff probability;

    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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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