Lower Bound Beliefs and Long-Term Interest Rates

Author/Editor:

Christian Grisse ; Signe Krogstrup ; Silvio Schumacher

Publication Date:

March 22, 2017

Electronic Access:

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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.

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 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.

Series:

Working Paper No. 17/62

Subject:

English

Publication Date:

March 22, 2017

ISBN/ISSN:

9781475588224/1018-5941

Stock No:

WPIEA2017062

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

40

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