UCLA

I present a joint model of yield curves and macroeconomic variables with an explicit effective zero lower bound by employing the concept of shadow interest rates. Bond yields are derived by assuming no arbitrage opportunities. However, they are not affine due to the zero lower bound. I thus develop a new approximate bond pricing formula that is correct up to a second order. To describe macroeconomic dynamics, I employ a standard New Keynesian macroeconomic model and estimate the model parameters for the US and Japan.

In the first chapter, I conduct three different types of counterfactual analyses of monetary policy. First, I evaluate a counterfactual analysis of raising the target inflation level. For both the US and Japan, I find that a higher inflation target steepens the yield curve when the current policy interest rate is not constrained by the zero lower bound. On the other hand, a higher inflation target increases long-term nominal yields while keeping short-term nominal yields unchanged when the current policy interest rate is constrained by the zero lower bound. Second, I study the effect of suddenly ending the zero interest rate policy. Third, I examine the impact of introducing a negative interest rate on the bond markets and the macro economy.

In the second chapter, I investigate whether the empirical findings documented before the zero lower bound period holds during the zero lower bound period. For example, I study how macroeconomic risks impact the shape of yield curves by looking at their decompositions and their factor loadings.

In the third chapter, I conduct two additional exercises. First, I incorporate a Markov regime switching feature into a New Keynesian macro finance model with the zero lower bound for nominal bond pricing. Second, I study the excess sensitivity of long-distant real forward interest rates to changes in the short-term nominal interest rate using a dataset of Japanese fixed income investors.