A Model of the Euro-Area Yield Curve with Discrete Policy Rates
Posted: 9 Jun 2012
Date Written: April 26, 2012
In this paper, I investigate the effects of the ECB's monetary policy on the yield curve, and make contributions at three levels. First, I propose a novel and tractable model of the yield curve that belongs to the class of affine term-structure models. Importantly, this model is consistent with positive policy rates, making it appropriate to deal with the zero-lower-bound restriction. The short end of the yield curve is explicitly influenced by the central-bank policy rate, the latter being a multiple of 25 basis points. Second, after having estimated the model using daily euro-area data covering the last thirteen years, I explore the behavior of risk premia at the short end of the yield curve. Third, I exploit the model in order to assess the potential impact of a commitment of the central bank to keep its policy rate at a very low level for a deterministic period of time.
Keywords: overnight index swaps, affine term-structure models, regime switching, non-standard monetary-policy measures
JEL Classification: E43, E44, E47, E52, G12
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