THE AFFINE RATIONAL POTENTIAL MODEL

2021 ◽  
pp. 2150031
Author(s):  
THE ANH NGUYEN ◽  
FRANK THOMAS SEIFRIED
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Term Structure ◽  
Potential Model ◽  
Extended Period ◽  
Model Specification ◽  
Currency Options ◽  
Rational Potential ◽  
Multiple Factors ◽  
Rational Term

We develop a class of rational term structure models in the framework of the potential approach based upon a family of positive supermartingales that are driven by an affine Markov process. These models generally feature nonnegative interest rates and analytic pricing formulae for zero bonds, caps, swaptions, and European currency options, even in the presence of multiple factors. Moreover, in a model specification, the short rate stays near the zero lower bound for an extended period.

scholarly journals A Structural Measure of the Shadow Federal Funds Rate

2021 ◽  
Vol 2021 (064) ◽  
pp. 1-40
Author(s):  
Callum Jones ◽  
◽  
Mariano Kulish ◽  
James Morley ◽  
◽  
...  
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Interest Rates ◽  
Term Structure ◽  
Structural Model ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Interest Rate Policy ◽  
Rate Policy ◽  
Structural Measure

We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.

scholarly journals A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt

2019 ◽  
Vol 101 (5) ◽  
pp. 933-949 ◽  
Author(s):  
Jens H. E. Christensen ◽  
Glenn D. Rudebusch
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Term Structure ◽  
Structural Breaks ◽  
Liquidity Risk ◽  
Time Varying ◽  
Real Rate ◽  
Risk Premiums ◽  
The Past ◽  
Percentage Points

The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

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