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Lower bound beliefs and long-term interest rates

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  • Christian Grisse
  • Signe Krogstrup
  • Silvio Schumacher

Abstract

We study the transmission of changes in the believed location of the lower bound to longterm interest rates since the introduction of negative interest rate policies. The expectations hypothesis of the term structure combined with a lower bound on policy rates suggests that the transmission of policy rate changes to long-term interest rates is reduced when policy rates approach this lower bound. We show that if market participants revise downward the believed location of the lower bound, this may reduce long-term yields and increase transmission. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.

Suggested Citation

  • Christian Grisse & Signe Krogstrup & Silvio Schumacher, 2017. "Lower bound beliefs and long-term interest rates," Working Papers 2017-05, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2017-05
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    References listed on IDEAS

    as
    1. Lemke, Wolfgang & Vladu, Andreea L., 2016. "Below the zero lower bound: A shadow-rate term structure model for the euro area," Discussion Papers 32/2016, Deutsche Bundesbank.
    2. Grisse, Christian, 2015. "The zero lower bound and movements in the term structure of interest rates," Economics Letters, Elsevier, vol. 131(C), pages 66-69.
    3. Glenn D. Rudebusch & Eric T. Swanson, 2012. "The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 105-143, January.
    4. repec:zbw:bofrdp:2016_019 is not listed on IDEAS
    5. Ruge-Murcia, Francisco J., 2006. "The expectations hypothesis of the term structure when interest rates are close to zero," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1409-1424, October.
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    Cited by:

    1. Schelling, Tan & Towbin, Pascal, 2022. "What lies beneath—Negative interest rates and bank lending," Journal of Financial Intermediation, Elsevier, vol. 51(C).
    2. Margherita Bottero & Stefano schiaffi, 2022. "Firm liquidity and the transmission of monetary policy," Temi di discussione (Economic working papers) 1378, Bank of Italy, Economic Research and International Relations Area.
    3. Simona Malovana & Josef Bajzik & Dominika Ehrenbergerova & Jan Janku, 2020. "A Prolonged Period of Low Interest Rates: Unintended Consequences," Research and Policy Notes 2020/02, Czech National Bank.
    4. 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.
    5. 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.
    6. Signe Krogstrup, 2017. "Monetary Policy Accommodation at the Lower Bound," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 52(1), pages 7-14, January.
    7. Bottero, Margherita & Minoiu, Camelia & Peydró, José-Luis & Polo, Andrea & Presbitero, Andrea F. & Sette, Enrico, 2022. "Expansionary yet different: Credit supply and real effects of negative interest rate policy," Journal of Financial Economics, Elsevier, vol. 146(2), pages 754-778.
    8. Demiralp, Selva & Eisenschmidt, Jens & Vlassopoulos, Thomas, 2021. "Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area," European Economic Review, Elsevier, vol. 136(C).
    9. Ruchir Agarwal & Miles Kimball, 2019. "Enabling Deep Negative Rates to Fight Recessions: A Guide," IMF Working Papers 2019/084, International Monetary Fund.
    10. Bongiovanni, Alessio & Reghezza, Alessio & Santamaria, Riccardo & Williams, Jonathan, 2021. "Do negative interest rates affect bank risk-taking?," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 350-364.
    11. Shunsuke Haba & Yuichiro Ito & Yoshiyasu Kasai, "undated". "The Impact of Negative Interest Rate Policy on Interest Rate Formation and Lending," Bank of Japan Working Paper Series 25-E-1, Bank of Japan.
    12. Peter Tillmann, 2019. "Robust Monetary Policy Under Uncertainty About the Lower Bound," MAGKS Papers on Economics 201914, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    13. Romain Baeriswyl & Lucas Marc Fuhrer & Petra Gerlach & Jörn Tenhofen, 2021. "The dynamics of bank rates in a negative-rate environment - the Swiss case," Working Papers 2021-05, Swiss National Bank.
    14. Margherita Bottero & Ms. Camelia Minoiu & José-Luis Peydró & Andrea Polo & Mr. Andrea F Presbitero & Enrico Sette, 2019. "Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data," IMF Working Papers 2019/044, International Monetary Fund.
    15. Aleksander Berentsen & Hugo van Buggenum & Romina Ruprecht, 2020. "On the negatives of negative interest rates and the positives of exemption thresholds," ECON - Working Papers 372, Department of Economics - University of Zurich.
    16. Christian Grisse & Silvio Schumacher, 2018. "Term structure dynamics at low and negative interest rates—evidence from Switzerland," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-17, December.
    17. Aleksander Berentsen & Romina Ruprecht & Hugo van Buggenum, 2023. "On the Negatives of Negative Interest Rates," Finance and Economics Discussion Series 2023-064, Board of Governors of the Federal Reserve System (U.S.).
    18. Mr. Gee Hee Hong & John Kandrac, 2018. "Pushed Past the Limit? How Japanese Banks Reacted to Negative Interest Rates," IMF Working Papers 2018/131, International Monetary Fund.
    19. Olga Kuznetsova & Sergey Merzlyakov & Sergey Pekarski, 2019. "Confidence in future monetary policy as a way to overcome the liquidity trap," Russian Journal of Economics, ARPHA Platform, vol. 5(2), pages 117-135, July.
    20. Christian Grisse & Silvio Schumacher, 2017. "The response of long-term yields to negative interest rates: evidence from Switzerland," Working Papers 2017-10, Swiss National Bank.

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    More about this item

    Keywords

    Monetary policy; negative interest rates; lower bound; yield curve; term structure;
    All these keywords.

    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

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