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The likelihood of effective lower bound events

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  • Michal Franta

Abstract

This paper provides estimates of the probability of an economy hitting its effective lower bound (ELB) on the nominal interest rate and of the expected duration of such an event for eight advanced economies. To that end, a mean-adjusted panel vector autoregression with static interdependencies and the possibility of regime change is estimated. The simulation procedure produces ELB risk estimates for both the short term, where the current phase of the business cycle plays an important role, and the medium term, where the occurrence of an ELB situation is determined mainly by the equilibrium values of macroeconomic variables. The paper also discusses the ELB event probability estimates with respect to previous approaches used in the literature.

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  • Michal Franta, 2018. "The likelihood of effective lower bound events," BIS Working Papers 731, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:731
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    5. Taisuke Nakata & Sebastian Schmidt & Timothy Hills, 2016. "The Risky Steady State and the Interest Rate Lower Bound," 2016 Meeting Papers 39, Society for Economic Dynamics.
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    Cited by:

    1. Beniak, Patrycja, 2019. "Central bank digital currency and monetary policy: a literature review," MPRA Paper 96663, University Library of Munich, Germany.

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    More about this item

    Keywords

    effective lower bound; ELB risk; mean adjustment; panel VAR; regime change;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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