Macroeconomic Bond Risks at the Zero Lower Bound
47 Pages Posted: 12 Aug 2016
Date Written: August 3, 2016
Close-to-zero interest rates challenge standard economic models in which zero lower bound (ZLB) is absent. We estimate a recursive utility model which features time-varying latent expected real growth, expected inflation, and stochastic inflation volatility. Using an approximate solution to bond prices, we show that the ZLB model successfully captures interest rates in a ZLB period, without a deterioration in fit to rates in normal times. Incorporating ZLB lowers the estimates of expected inflation and increases inflation volatility. It leads to large, negative and volatile shadow rates, large and volatile shadow risk premia, and small and volatile lift-off probabilities.
Keywords: Macro-Finance Term Structure Models, Zero Lower Bound, Shadow Rates, Shadow Risk Premia
JEL Classification: E43, E44, G12
Suggested Citation: Suggested Citation