Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212357 
Authors: 
Year of Publication: 
2016
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 19/2016
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Typically a constant – or zero – lower bound for interest rates is applied in shadow rate term structure models. However, euro area yield curve data suggest that a time-varying lower bound might be appropriate for the euro area. I show that this indeed is the case, i.e. a shadow rate model with time-varying lower bound outperforms the constant lower bound model in euro area data. I argue that the time-variation in the lower bound is related to the deposit facility rate and, thus, to monetary policy. This time-variation in the lower bound gives a new channel via which monetary policy may affect the yield curve in a shadow rate model. I show that the intensity of this channel depends on how tightly the lower bound restricts the yield curve, and I argue that this channel has recently become important for the euro area.
JEL: 
E43
E44
E52
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-117-7
Document Type: 
Working Paper

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