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Macroeconomic Bond Risks at the Zero Lower Bound

47 Pages Posted: 12 Aug 2016  

Nicole Branger

University of Muenster - Finance Center Muenster

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Ivan Shaliastovich

University of Wisconsin - Madison

Dongho Song

Boston College - Department of Economics

Date Written: August 3, 2016

Abstract

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

Branger, Nicole and Schlag, Christian and Shaliastovich, Ivan and Song, Dongho, Macroeconomic Bond Risks at the Zero Lower Bound (August 3, 2016). Available at SSRN: https://ssrn.com/abstract=2820207 or http://dx.doi.org/10.2139/ssrn.2820207

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)
+49 69 798 33901 (Fax)

Ivan Shaliastovich

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Dongho Song (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Maloney Hall 382
Chestnut Hill, MA 02467
United States

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