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Lower bound uncertainty and long-term interest rates

Author

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  • Christian Grisse

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.

Suggested Citation

  • Christian Grisse, 2020. "Lower bound uncertainty and long-term interest rates," Working Papers 2020-14, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2020-14
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2020/working_paper_2020_14
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    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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