A Model of the Euro-Area Yield-Curve with Discrete Policy Rates

49 Pages Posted: 4 Mar 2012 Last revised: 31 Aug 2014

See all articles by Jean-Paul Renne

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

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Date Written: August 30, 2014

Abstract

This paper presents a no-arbitrage yield-curve model that explicitly incorporates the central-bank policy rate. The model, whose estimation is based on daily euro-area data, provides evidence of the existence of sizeable monetary-policy-related risk premiums in the yield curve. It is further used to simulate forward-guidance measures. The results suggest that a credible commitment of the central bank to keep its policy rate unchanged for a given period of time can result in substantial declines in yields: a commitment to keep the policy rate at 1% over the next 2 years would imply a decline in the 5-year rate of about 25 basis points.

Keywords: affine term-structure models, zero lower bound, regime switching, forward policy guidance

JEL Classification: E43, E44, E47, E52, G12

Suggested Citation

Renne, Jean-Paul, A Model of the Euro-Area Yield-Curve with Discrete Policy Rates (August 30, 2014). Available at SSRN: https://ssrn.com/abstract=2015236 or http://dx.doi.org/10.2139/ssrn.2015236

Jean-Paul Renne (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

UNIL, Batiment Internef
Lausanne, 1015
Switzerland

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