IMF Working Papers

Lower Bound Beliefs and Long-Term Interest Rates

By Christian Grisse, Signe Krogstrup, Silvio Schumacher

March 22, 2017

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Christian Grisse, Signe Krogstrup, and Silvio Schumacher. Lower Bound Beliefs and Long-Term Interest Rates, (USA: International Monetary Fund, 2017) accessed September 19, 2024

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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.

Subject: Central bank policy rate, Financial services, Long term interest rates, Monetary policy, Negative interest rates, Short term interest rates, Zero lower bound

Keywords: Australia and New Zealand, Basis point, Central bank, Central bank policy rate, Global, Higher-interest rate country, Interest rate announcement, Interest rate change, Interest rate cut, Interest rate level, Long term interest rates, Lower bound, Monetary policy, Negative interest rates, Policy rate, Policy rate cut, Policy rate type, Rate announcement, Rate decline, Rate shock, Short term interest rates, Structure model, Surprise ECB rate, Term structure, WP, Yield curve, Zero lower bound

Publication Details

  • Pages:

    40

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2017/062

  • Stock No:

    WPIEA2017062

  • ISBN:

    9781475588224

  • ISSN:

    1018-5941