With a Little Help from My Friends: Survey-Based Derivation of Euro Area Short Rate Expectations at the Effective Lower Bound

49 Pages Posted: 2 Apr 2018

See all articles by Felix Geiger

Felix Geiger

Deutsche Bundesbank

Fabian Schupp

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2018

Abstract

The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound and accounts for the spread between the policy and short-term OIS rate. It also allows for future changes in the effective lower bound and incorporates survey information in order to pin down the level of longer-term rate expectations. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases identified based on a non-linear high-frequency external instrument approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation.

Keywords: Term structure modeling, short rate expectations, lower bound, survey information, yield curve decomposition, monetary policy, euro area

JEL Classification: E32, E43, E44, E52

Suggested Citation

Geiger, Felix and Schupp, Fabian, With a Little Help from My Friends: Survey-Based Derivation of Euro Area Short Rate Expectations at the Effective Lower Bound (March 28, 2018). Available at SSRN: https://ssrn.com/abstract=3150276 or http://dx.doi.org/10.2139/ssrn.3150276

Felix Geiger

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Fabian Schupp (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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