How Likely is the Zero Lower Bound?

17 Pages Posted: 12 Mar 2019

See all articles by Thomas Lubik

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Christian Matthes

Federal Reserve Bank of Richmond

Date Written: 2019

Abstract

We estimate the probability that the federal funds rate will be at or below the zero lower bound over a ten-year time horizon. We do so by specifying and estimating a time-varying parameter vector autoregressive model for key US macroeconomic aggregates. Based on the estimated model, we generate a distribution of future outcomes from which we compute such probabilities. We find that the zero lower bound probability ranges between 15 percent and 30 percent in the longer term depending on the specific measure used. In the near term, this probability is effectively zero. Robustness checks for historic episodes suggest that the TVP-VAR captures the underlying dynamics well and that it would have put substantial likelihood on the interest rate being at the zero lower bound during 2009-14.

Keywords: federal funds rate, zero lower bound, TVP-VAR

Suggested Citation

Lubik, Thomas and Matthes, Christian, How Likely is the Zero Lower Bound? (2019). Economic Quarterly, Issue 1Q, pp. 41-54, 2019. Available at SSRN: https://ssrn.com/abstract=3350700

Thomas Lubik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Christian Matthes

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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