Assessing the Effectiveness of Date-Based Forward Guidance at the Zero Lower Bound with a Non-Gaussian Affine Term-Structure Model
HKIMR Working Paper No.19/2014
30 Pages Posted: 8 Aug 2014
Date Written: August 7, 2014
Using a non-Gaussian affine term-structure model, this paper evaluates the effectiveness of the date-based forward guidance at the zero lower bound. The model extracts the expected dynamics of two state variables (the short-term interest rate and its mean) embedded in the entire Treasury yield curve. Using simulations and an event study, we find that the model’s dynamics were significantly altered by the first announcement of date-based forward guidance in August 2011 and speculation about tapering in May 2013. The model offers a probabilistic approach in assessing the market’s perception towards the Federal Reserve’s projections of the federal funds rate.
Keywords: Forward Guidance, Zero Lower Bound, Non-Gaussian Term-Structure Model
JEL Classification: E43, E43, E52, E58
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