The Term Structure of Macroeconomic Risks at the Zero Lower Bound

97 Pages Posted: 4 Nov 2016 Last revised: 16 Jun 2020

See all articles by Guillaume Roussellet

Guillaume Roussellet

McGill University - Desautels Faculty of Management

Date Written: June 15, 2020


This paper exploits the term structures of treasury yields to extract information about macroeconomic dynamics during the effective lower bound period (ELB). I introduce a new no-arbitrage macro-finance affine model jointly representing stochastic inflation trend and volatility
with a short-term nominal yield that can be persistently stuck at its lower bound. The model consistently attributes movements in the long-end of treasury curves to the pricing of macroeconomic shocks, providing a tighter identification of inflation components. Estimation
performed on U.S. real and nominal treasuries reveals that the ELB period coincides with lower inflation trend and elevated inflation volatility. These adverse inflation outcomes produce significant deflation fears, leading investors to be averse to tightening monetary policy shocks and
justifying an ELB embrace by the monetary authority. Lifting off can have destabilizing effects depending on the anchoring of expectations of a binding ELB, leaving room for unconventional monetary policy

Keywords: Affine Term Structure Model, Zero Lower Bound, QTSM, TIPS, Liftoff Probabilities, Inflation Risk Premia

JEL Classification: C58, E43, G12

Suggested Citation

Roussellet, Guillaume, The Term Structure of Macroeconomic Risks at the Zero Lower Bound (June 15, 2020). Available at SSRN: or

Guillaume Roussellet (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1

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