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

Johannsen, Benjamin K.; Mertens, Elmar

doi:10.17016/feds.2016.033

Cited by 45 publications

(40 citation statements)

References 83 publications

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“…1 The estimates reported in Johannsen and Mertens (2016) show a less pronounced decline, likely because of the assumption of time-varying volatility in their model.…”

Section: Introductionmentioning

confidence: 97%

Measuring the Natural Rate of Interest: International Trends and Determinants

Holston¹,

Laubach

Williams

2016

FEDS

173

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U.S. estimates of the natural rate of interest -the real short-term interest rate that would prevail absent transitory disturbances -have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies -Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

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“…1 The estimates reported in Johannsen and Mertens (2016) show a less pronounced decline, likely because of the assumption of time-varying volatility in their model.…”

Section: Introductionmentioning

confidence: 97%

Measuring the Natural Rate of Interest: International Trends and Determinants

Holston¹,

Laubach

Williams

2016

FEDS

173

View full text Add to dashboard Cite

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“…First, our approach is arguably conservative, because our macro trend estimates have not been fine-tuned to incorporate the information in long-term yields via no-arbitrage restrictions. We avoid using trend estimates from the literature that are derived from long-term yields, such as the estimates of π * t by Christensen et al (2010) or estimates of r * t by Johannsen and Mertens (2016), Rudebusch (2017), or Del Negro et al (2017). It would be somewhat tautological to demonstrate a link between long-term bond yields and a trend that was estimated from those yields.…”

Section: Data and Trend Estimatesmentioning

confidence: 99%

“…12 Other estimates of this long-run r * t include Johannsen and Mertens (2016) and Del Negro et al (2017). 13 Survey-based estimates of r * t are problematic for at least two reasons.…”

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confidence: 99%

Interest Rates Under Falling Stars

Bauer

Rudebusch

2019

ERWP

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While theory predicts that the equilibrium real interest rate, r * t , and the perceived trend in inflation, π * t , are fundamental determinants of the yield curve, macro-finance models generally treat them as constant. We show that accounting for time-varying macro trends is critical for understanding the empirical dynamics of U.S. Treasury yields and risk pricing. It fundamentally changes estimated risk premiums in long-term bond yields, leads to large gains in predictions of excess bond returns and long-range out-of-sample forecasts of interest rates, and captures a substantial share of interest rate variability at low frequencies.

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“…Other papers outside the dynamic term-structure literature (Johannsen and Mertens, 2016) also use time series models to better understand the effective short-term interest rate. A key difference in our approach is that while Johannsen and Mertens (2016) measure the nominal interest rate that would prevail in the absence of the ELB, our results are interpreted as the likeliest effective monetary policy stance, measured in terms of the equivalent interest rate during normal times.…”

Section: Relevant Literaturementioning

confidence: 99%

“…A key difference in our approach is that while Johannsen and Mertens (2016) measure the nominal interest rate that would prevail in the absence of the ELB, our results are interpreted as the likeliest effective monetary policy stance, measured in terms of the equivalent interest rate during normal times. Other papers close to Johannsen and Mertens (2016) include Iwata and Wu (2006), Nakajima (2011), andChan andStrachan (2014). A hybrid approach, which bridges dynamic term-structure and time series models, can be found in Jackson Young (2014).…”

Section: Relevant Literaturementioning

confidence: 99%

Inferring the Shadow Rate from Real Activity

Garcia¹,

Skaperdas

2018

FEDS

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We estimate a shadow rate consistent with the paths of time series capturing real activity. This allows us to quantify the real effects of unconventional monetary policy in terms of equivalent short-term interest rate movements. We find that large-scale asset purchases and forward guidance had significant real effects equivalent of up to a four percent reduction in the federal funds rate. JEL Classification: E43, E47, E52Keywords: effective lower bound, external instrument VAR, Kalman filter, shadow rate, unconventional monetary policy † We would like to thank

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

Cited by 45 publications

References 83 publications

Measuring the Natural Rate of Interest: International Trends and Determinants

Measuring the Natural Rate of Interest: International Trends and Determinants

Interest Rates Under Falling Stars

Inferring the Shadow Rate from Real Activity

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