Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: Anna Cieslak, Duke University
Interest Rates Under Falling Stars
AbstractTheory predicts that the equilibrium real interest rate, r*, and the perceived trend in inflation, pi*, are key determinants of the term structure of interest rates. However, term structure analyses generally assume that these variables are constant. Instead, we show that allowing for time variation in both r* and pi* is crucial for understanding the empirical dynamics of U.S.~Treasury yields and risk pricing. Doing so fundamentally changes estimates of the risk and term premiums in long-term bond yields, substantially improves the accuracy of excess bond return forecasts and of long-range out-of-sample forecasts of interest rates, and captures a substantial share of interest rate variability at low frequencies.
A Time Series Model of Interest Rates With the Effective Lower Bound
AbstractModeling interest rates over samples that include the Great Recession requires taking stock of the effective lower bound (ELB) on nominal interest rates. We propose a flexible time--series approach which includes a ``shadow rate''---a notional rate that is less than the ELB during the period in which the bound is binding---without imposing no--arbitrage assumptions.
The shadow rate serves as a latent state variable to characterize the joint dynamics of yields and macro variables. The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years.
Negative Interest Rate Policy and Yield Curve
AbstractWe extract the market's expectations about the ECB's negative interest rate policy from the yield curve and study its impact on the yield curve. To capture the rich dynamics of the short end of the yield curve, we introduce two policy indicators, which summarize the immediate and longer-horizon future monetary policy stances. The ECB has cut interest rates four times under zero. We find the June 2014 and December 2015 cuts were expected the month before, and the September 2014 cut was unanticipated. Most interestingly, the March 2016 cut was expected 4 months before the actual cut.
Harvard Business School
Johns Hopkins University
Federal Reserve Bank of Chicago
Federal Reserve Board
- G1 - General Financial Markets