BoJ paper suggests models may misrepresent impact of easing at ZLB
Research published yesterday by the Bank of Japan (BoJ) finds evidence that a model that is popular among monetary economists leads to errors when monetary policy faces a zero lower bound (ZLB).
The working paper, Estimating Term Premia at the Zero Bound, by Hibiki Ichiue and Yoichi Ueno, tests the commonly used affine term structure model (ATSM) against a shadow rate model (SRM) that accounts for the ZLB. They find that the ATSM has a "tendency to underestimate the term premium", but this
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