Monetary Policy Expectations at the Zero Lower Bound

44 Pages Posted: 3 Oct 2013 Last revised: 22 May 2015

See all articles by Michael Bauer

Michael Bauer

Universit├Ąt Hamburg

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Date Written: May 21, 2015

Abstract

We show that conventional dynamic term structure models (DTSMs) estimated on recent U.S. data severely violate the zero lower bound (ZLB) on nominal interest rates and deliver poor forecasts of future short rates. In contrast, shadow-rate DTSMs account for the ZLB by construction, capture the resulting distributional asymmetry of future short rates, and achieve good forecast performance. These models provide more accurate estimates of the most likely path for future monetary policy --- including the timing of policy liftoff from the ZLB and the pace of subsequent policy tightening. We also demonstrate the benefits of including macroeconomic factors in a shadow-rate DTSM when yields are constrained near the ZLB.

Keywords: dynamic term structure models, shadow rates, policy liftoff, macro-finance

JEL Classification: E43, E44, E52

Suggested Citation

Bauer, Michael and Rudebusch, Glenn D., Monetary Policy Expectations at the Zero Lower Bound (May 21, 2015). Available at SSRN: https://ssrn.com/abstract=2334540 or http://dx.doi.org/10.2139/ssrn.2334540

Michael Bauer (Contact Author)

Universit├Ąt Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

HOME PAGE: http://www.michaeldbauer.com

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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