Lower bound beliefs and long-term interest rates

April 5, 2017
Issue 2017-05

Summary

We study the transmission of changes in the believed location of the lower bound to longterm 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 the transmission of policy rate changes to long-term interest rates 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 reduce long-term yields and increase transmission. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.

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Issue:
05
Pages:
48
JEL classification:
E43, E52
Keywords:
Monetary policy, negative interest rates, lower bound, yield curve, term structure
Year:
2017

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Author(s)

  • Dr. Christian Grisse

  • Signe Krogstrup

  • Dr. Silvio Schumacher

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