Monetary policy and the yield curve at zero interest

• Black’s (1995) yield curve model takes account of the zero lower bound.
• We estimate a Black’s model with Japan’s data.
• We then extract market expectations about duration time of zero interest.
• We find the expectations have substantially varied.
• The expectations are tightly linked with survey measures of expected inflation.

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.