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With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound

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  • Schupp, Fabian
  • Geiger, Felix

Abstract

The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve sample. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound accounting for the spread between the policy and short-term OIS rate and it also allows for future changes in the effective lower bound. In addition, it incorporates survey information in order to pin down the level of longer-term rate expectations. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases based on high frequency identification approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation.

Suggested Citation

  • Schupp, Fabian & Geiger, Felix, 2018. "With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181529, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc18:181529
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    References listed on IDEAS

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    Cited by:

    1. Peter Tillmann & Andreas Walter, 2018. "ECB vs Bundesbank: Diverging Tones and Policy Effectiveness," GRU Working Paper Series GRU_2018_009, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    2. Lemke, Wolfgang & Werner, Thomas, 2020. "Dissecting long-term Bund yields in the run-up to the ECB’s public sector purchase programme," Journal of Banking & Finance, Elsevier, vol. 111(C).
    3. Tillmann, Peter & Walter, Andreas, 2019. "The effect of diverging communication: The case of the ECB and the Bundesbank," Economics Letters, Elsevier, vol. 176(C), pages 68-74.
    4. Rostagno, Massimo & Altavilla, Carlo & Carboni, Giacomo & Lemke, Wolfgang & Motto, Roberto & Saint Guilhem, Arthur & Yiangou, Jonathan, 2019. "A tale of two decades: the ECB’s monetary policy at 20," Working Paper Series 2346, European Central Bank.

    More about this item

    Keywords

    Term structure modeling; short rate expectations; lower bound; survey information; yield curve decomposition; monetary policy; euro area;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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