Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
967267 | Journal of Monetary Economics | 2006 | 16 Pages |
Abstract
In an economy where cash can be stored costlessly in nominal terms, the nominal interest rate is bounded below by zero. This paper derives the implications of this non-negativity constraint for the term structure and shows that it induces a nonlinear and convex relation between short- and long-term interest rates. The long-term rate responds asymmetrically to changes in the short-term rate, and by less than that is predicted by the benchmark linear model. In particular, a decrease in the short-term rate produces a smaller response in the long-term rate than an increase of the same magnitude. The empirical predictions of the model are examined using data from Japan.
Related Topics
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Authors
Francisco J. Ruge-Murcia,