Monetary policy and the yield curve at zero interest |
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| Affiliation: | 1. Hirao School of Management, Konan University, Address: 8-33 Takamatsu, Nishinomiya-city, Hyogo 663-8204, Japan;2. Department of Economics, Osaka Gakuin University, Address: 2-36-1 Kishibeminami, Suita-City, Osaka 564-8511, Japan;1. Oesterreichische Nationalbank (OeNB), Otto-Wagner-Platz 3, Wien 1090, Austria;2. Salzburg Centre of European Union Studies (SCEUS), University of Salzburg, Mönchsberg 2a, Salzburg 5020, Austria |
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| Abstract: | In contrast to affine term structure models, Black’s (1995) model of interest rates as options has properties suitable to examine the yield curve when the short-term interest rate is near zero. We estimate a Black’s model with Japan’s data to extract market expectations about duration of zero interest. We find that expectations about duration have substantially varied, which contradicts with the assumption utilized in the literature. We also find a tight link between expectations about duration and survey measures of inflation expectations, which appears to be attributable to the Bank of Japan’s commitment conditional on inflation. |
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| Keywords: | Shadow rate Zero lower bound Quantitative easing Japan First hitting time |
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