The Likelihood of Effective Lower Bound Events

40 Pages Posted: 25 Jun 2018

Date Written: June 2018

Abstract

This paper provides estimates of the probability of an economy hitting its effective lower bound (ELB) on the nominal interest rate and of the expected duration of such an event for eight advanced economies. To that end, a mean-adjusted panel vector autoregression with static interdependencies and the possibility of regime change is estimated. The simulation procedure produces ELB risk estimates for both the short term, where the current phase of the business cycle plays an important role, and the medium term, where the occurrence of an ELB situation is determined mainly by the equilibrium values of macroeconomic variables. The paper also discusses the ELB event probability estimates with respect to previous approaches used in the literature.

Keywords: effective lower bound, ELB risk, mean adjustment, panel VAR, regime change

JEL Classification: E37, E52, C11

Suggested Citation

Franta, Michal, The Likelihood of Effective Lower Bound Events (June 2018). BIS Working Paper No. 731. Available at SSRN: https://ssrn.com/abstract=3201080

Michal Franta (Contact Author)

Czech National Bank ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

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