A Time Series Model of Interest Rates With the Effective Lower Bound | Zendy

Benjamin K. Johannsen | Zendy; Elmar Mertens | Zendy

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A Time Series Model of Interest Rates With the Effective Lower Bound

Author(s) -

Benjamin K. Johannsen,

Elmar Mertens

Publication year - 2016

Publication title -

finance and economics discussion series

Language(s) - English

Resource type - Journals

eISSN - 2767-3898

pISSN - 1936-2854

DOI - 10.17016/feds.2016.033

Subject(s) - interest rate , upper and lower bounds , econometrics , zero lower bound , notional amount , recession , rendleman–bartter model , stock (firearms) , series (stratigraphy) , economics , mathematics , monetary economics , finance , engineering , keynesian economics , geology , paleontology , mechanical engineering , mathematical analysis

Modeling interest rates over samples that include the Great Recession requires taking stock of the effective lower bound (ELB) on nominal interest rates. We propose a flexible time– series approach which includes a “shadow rate”—a notional rate that is less than the ELB during the period in which the bound is binding—without imposing no–arbitrage assumptions.{{p}}The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years.

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