The Term Structure of Macroeconomic Risks at the Zero Lower Bound

91 Pages Posted: 4 Nov 2016 Last revised: 8 Jul 2021

See all articles by Guillaume Roussellet

Guillaume Roussellet

McGill University - Desautels Faculty of Management

Date Written: July 7, 2021

Abstract

This paper proposes a new macro-finance model that solves the tension between tractability, flexibility in macroeconomic dynamics, and consistency of the term structures of treasury yields with the effective lower bound (ELB).
I use the term structures of U.S. nominal and real treasury yields from 1990 to explore the interdependence between inflation expectations, volatility, and monetary policy at the ELB.
The estimation reveals that real yields stay elevated during the ELB due to large premia and deflation fears, produced by a persistent shift in inflation dynamics, with low average inflation and heightened inflation volatility.

Keywords: Affine Term Structure Model, Zero Lower Bound, QTSM, TIPS, Liftoff Probabilities, Inflation Risk Premia

JEL Classification: C58, E43, G12

Suggested Citation

Roussellet, Guillaume, The Term Structure of Macroeconomic Risks at the Zero Lower Bound (July 7, 2021). Available at SSRN: https://ssrn.com/abstract=2863271 or http://dx.doi.org/10.2139/ssrn.2863271

Guillaume Roussellet (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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