ECB paper takes new approach to modelling lower bound

Bonds performance

A working paper published by the European Central Bank proposes a new approach to modelling the yields on bonds when interest rates are at the lower bound.

In Modelling yields at the lower bound through regime shifts, Peter Hördahl and Oreste Tristani use a “regime-switching approach”. In their model, when interest rates are above the lower bound, the yield on short-term bonds “interacts with other economic variables in a standard way”. But when rates reach the lower bound, short-term yields

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