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Lower Bound Beliefs and Long-Term Interest Rates
Author:
Christian Grisse null

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Signe Krogstrup
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Silvio Schumacher null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 062
Language:
English
Publication Date:
22 Mar 2017
DOI:
https://doi.org/10.5089/9781475588224.001
ISBN:
9781475588224
ISSN:
1018-5941
Pages:
40
Keywords:
WP; policy rate; central bank; monetary policy; basis point; negative interest rates; lower bound; yield curve; term structure; interest rate level; structure model; interest rate announcement; surprise ECB rate; Policy rate type; rate shock; interest rate cut; policy rate cut; rate announcement; rate decline; interest rate change; higher-interest rate country; Central bank policy rate; Long term interest rates; Zero lower bound; Short term interest rates; Global; Australia and New Zealand
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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 normal policy transmission 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 in itself reduce long-term yields. Moreover, normal policy transmission to long-term rates increases. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund