Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?
ISBN: 978-1-78560-353-2, eISBN: 978-1-78560-352-5
Publication date: 6 January 2016
Abstract
Recent U.S. Treasury yields have been constrained to some extent by the zero lower bound (ZLB) on nominal interest rates. Therefore, we compare the performance of a standard affine Gaussian dynamic term structure model (DTSM), which ignores the ZLB, to a shadow-rate DTSM, which respects the ZLB. Near the ZLB, we find notable declines in the forecast accuracy of the standard model, while the shadow-rate model forecasts well. However, 10-year yield term premiums are broadly similar across the two models. Finally, in applying the shadow-rate model, we find no gain from estimating a slightly positive lower bound on U.S. yields.
Keywords
Acknowledgements
Acknowledgments
We thank two anonymous referees, Martin Møller Andreasen as well as conference participants at the FRBSF Workshop on “Term Structure Modeling at the Zero Lower Bound,” the 20th International Conference on Computing in Economics and Finance, the First Annual Conference of the International Association for Applied Econometrics, and the Banque de France Workshop on “Term Structure Modeling and the Zero Lower Bound” – especially Don Kim and Jean-Paul Renne – for helpful comments. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. We thank Lauren Ford and Simon Riddell for excellent research assistance.
Citation
Christensen, J.H.E. and Rudebusch, G.D. (2016), "Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?", Dynamic Factor Models (Advances in Econometrics, Vol. 35), Emerald Group Publishing Limited, Leeds, pp. 75-125. https://doi.org/10.1108/S0731-905320150000035003
Publisher
:Emerald Group Publishing Limited
Copyright © 2016 Emerald Group Publishing Limited