Lower Bound Beliefs and Long-Term Interest Rates

41 Pages Posted: 25 Apr 2017

See all articles by Christian Grisse

Christian Grisse

Swiss National Bank

Signe Krogstrup

National Bank of Denmark - Economics Department; Danmarks Nationalbank (The Central Bank of Denmark); IMF

Silvio Schumacher

Swiss National Bank

Date Written: March 2017

Abstract

We study the transmission of changes in the believed location of the lower bound to long-term interest rates since the introduction of negative interest rate policies. The expectations hypothesis of the term structure combined with a lower bound on policy rates suggests that normal policy transmission is reduced when policy rates approach this lower bound. We show that if market participants revise downward the believed location of the lower bound, this may in itself reduce long-term yields. Moreover, normal policy transmission to long-term rates increases. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.

Keywords: Monetary policy, Negative interest rates, lower bound, yield curve, term structure, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: E43, E52

Suggested Citation

Grisse, Christian and Krogstrup, Signe and Schumacher, Silvio, Lower Bound Beliefs and Long-Term Interest Rates (March 2017). IMF Working Paper No. 17/62, Available at SSRN: https://ssrn.com/abstract=2958205

Christian Grisse (Contact Author)

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Signe Krogstrup

National Bank of Denmark - Economics Department ( email )

1093 Copenhagen
Denmark

Danmarks Nationalbank (The Central Bank of Denmark) ( email )

Havnegade 5
Copenhagen, 1093
Denmark

IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Silvio Schumacher

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

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