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

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Authors Benjamin K. Johannsen, Elmar Mertens
Journal/Conference Name Finance and Economics Discussion Series - Divisions of Research & Statistics and Monetary Affairs - Federal Reserve Board, Washington, D.C.
Paper Category
Paper Abstract 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. The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years.
Date of publication 2016
Code Programming Language Fortran

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