IDEAS home Printed from https://ideas.repec.org/a/wly/jmoncb/v55y2023i2-3p619-634.html
   My bibliography  Save this article

Lower Bound Uncertainty and Long‐Term Interest Rates

Author

Listed:
  • CHRISTIAN GRISSE

Abstract

Nominal interest rates are constrained by an effective lower bound, but the level of the lower bound is uncertain. This paper uses a simple shadow rate term structure model to study how lower bound uncertainty affects long‐term interest rates. A decline in lower bound uncertainty, in the sense of a mean‐preserving contraction, is associated with a drop in expected short rates. The effect on the variance of short rates, and hence the term premium, is ambiguous. A calibration to Canadian data suggests that a decline in lower bound uncertainty is associated with a modest drop in interest rates.

Suggested Citation

  • Christian Grisse, 2023. "Lower Bound Uncertainty and Long‐Term Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 619-634, March.
    • Handle: RePEc:wly:jmoncb:v:55:y:2023:i:2-3:p:619-634
    DOI: 10.1111/jmcb.12890
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jmcb.12890
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jmcb.12890?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Oscar Jorda & Kevin Salyer, 2003. "The Response of Term Rates to Monetary Policy Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 941-962, October.
    2. Jing Cynthia Wu & Fan Dora Xia, 2020. "Negative interest rate policy and the yield curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(6), pages 653-672, September.
    3. Dominika Kolcunova & Tomas Havranek, 2018. "Estimating the Effective Lower Bound on the Czech National Bank’s Policy Rate," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(6), pages 550-577, December.
    4. Jae Sim & Egon Zakrajsek & Simon Gilchrist, 2010. "Uncertainty, Financial Frictions, and Investment Dynamics," 2010 Meeting Papers 1285, Society for Economic Dynamics.
    5. Peter Tillmann, 2020. "Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 803-833, June.
    6. Cristina Arellano & Yan Bai & Patrick J. Kehoe, 2019. "Financial Frictions and Fluctuations in Volatility," Journal of Political Economy, University of Chicago Press, vol. 127(5), pages 2049-2103.
    7. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    8. Joseph Abadi & Markus Brunnermeier & Yann Koby, 2023. "The Reversal Interest Rate," American Economic Review, American Economic Association, vol. 113(8), pages 2084-2120, August.
    9. Taisuke Nakata, 2017. "Uncertainty at the Zero Lower Bound," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 186-221, July.
    10. Jonathan Witmer & Jing Yang, 2016. "Estimating Canada’s Effective Lower Bound," Bank of Canada Review, Bank of Canada, vol. 2016(Spring), pages 3-14.
    11. Oscar Jorda & Kevin Salyer, 2003. "The Response of Term Rates to Monetary Policy Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 941-962, October.
    12. James J. McAndrews, 2015. "Negative nominal central bank policy rates: where is the lower bound?," Speech 168, Federal Reserve Bank of New York.
    13. Kim, Don H. & Singleton, Kenneth J., 2012. "Term structure models and the zero bound: An empirical investigation of Japanese yields," Journal of Econometrics, Elsevier, vol. 170(1), pages 32-49.
    14. Tillmann Peter, 2021. "Robust Monetary Policy Under Uncertainty About the Lower Bound," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 309-321, January.
    15. Francisco Barillas & Kristoffer P. Nimark, 2017. "Speculation and the Term Structure of Interest Rates," The Review of Financial Studies, Society for Financial Studies, vol. 30(11), pages 4003-4037.
    16. Michael D. Bauer & Glenn D. Rudebusch, 2016. "Monetary Policy Expectations at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(7), pages 1439-1465, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hirokuni Iiboshi & Mototsugu Shintani & Kozo Ueda, 2022. "Estimating a Nonlinear New Keynesian Model with the Zero Lower Bound for Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1637-1671, September.
    2. Fornero, Jorge & Kirchner, Markus & Molina, Carlos, 2024. "Estimating shadow policy rates in a small open economy and the role of foreign factors," Journal of International Money and Finance, Elsevier, vol. 140(C).
    3. Barbara Rossi, 2018. "Identifying and estimating the effects of unconventional monetary policy in the data: How to do It and what have we learned?," Economics Working Papers 1641, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2020.
    4. Coroneo, Laura & Pastorello, Sergio, 2020. "European spreads at the interest rate lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    5. Jean-Guillaume Sahuc & Grégory Levieuge & José Garcia-Revelo, 2024. "Revisiting 15 Years of Unusual Transatlantic Monetary Policies," Working Papers hal-04563708, HAL.
    6. Özcan, Gülserim & Traficante, Guido, 2024. "Optimal robust monetary and fiscal policy under uncertainty on the lower bound," Journal of Macroeconomics, Elsevier, vol. 81(C).
    7. Giovanni Pellegrino & Efrem Castelnuovo & Giovanni Caggiano, 2023. "Uncertainty And Monetary Policy During The Great Recession," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 577-606, May.
    8. Rossi, Barbara, 2019. "Identifying and Estimating the Effects of Unconventional Monetary Policy: How to Do It And What Have We Learned?," CEPR Discussion Papers 14064, C.E.P.R. Discussion Papers.
    9. Rostagno, Massimo & Altavilla, Carlo & Carboni, Giacomo & Lemke, Wolfgang & Motto, Roberto & Saint Guilhem, Arthur, 2021. "Combining negative rates, forward guidance and asset purchases: identification and impacts of the ECB’s unconventional policies," Working Paper Series 2564, European Central Bank.
    10. Cao, Jin & Dinger, Valeriya & Gómez, Tomás & Gric, Zuzana & Hodula, Martin & Jara, Alejandro & Juelsrud, Ragnar & Liaudinskas, Karolis & Malovaná, Simona & Terajima, Yaz, 2023. "Monetary policy spillover to small open economies: Is the transmission different under low interest rates?," Journal of Financial Stability, Elsevier, vol. 65(C).
    11. Marcello Pericoli & Marco Taboga, 2022. "Nearly Exact Bayesian Estimation of Non-linear No-Arbitrage Term-Structure Models [Pricing the Term Structure with Linear Regressions]," Journal of Financial Econometrics, Oxford University Press, vol. 20(5), pages 807-838.
    12. Peter Tillmann, 2020. "Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 803-833, June.
    13. Dossani, Asad, 2024. "Monetary policy and currency variance risk premia," Research in International Business and Finance, Elsevier, vol. 69(C).
    14. Monfort, Alain & Pegoraro, Fulvio & Renne, Jean-Paul & Roussellet, Guillaume, 2017. "Staying at zero with affine processes: An application to term structure modelling," Journal of Econometrics, Elsevier, vol. 201(2), pages 348-366.
    15. Michael Plante & Alexander W. Richter & Nathaniel A. Throckmorton, 2018. "The Zero Lower Bound and Endogenous Uncertainty," Economic Journal, Royal Economic Society, vol. 128(611), pages 1730-1757, June.
    16. Grimme, Christian, 2017. "Uncertainty and the Cost of Bank vs. Bond Finance," MPRA Paper 79852, University Library of Munich, Germany.
    17. Carlos Alba & Gabriel Cuadra & Juan R. Hernandez & Raul Ibarra, 2024. "Capital flows to emerging economies and global risk aversion during the COVID‐19 pandemic," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2804-2836, July.
    18. Hakan Yilmazkuday, 2024. "Pass‐through of shocks into different U.S. prices," Review of International Economics, Wiley Blackwell, vol. 32(3), pages 1300-1315, August.
    19. Czudaj, Robert L., 2020. "Is the negative interest rate policy effective?," Journal of Economic Behavior & Organization, Elsevier, vol. 174(C), pages 75-86.
    20. Alfaro, Rodrigo & Piña, Marco, 2023. "Estimates of the US Shadow-Rate," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(1).

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jmoncb:v:55:y:2023:i:2-3:p:619-634. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.