How Does the Bond Market Perceive Macroeconomic Risks under Zero Lower Bound ? ∗

@inproceedings{Sakurai2015HowDT,
  title={How Does the Bond Market Perceive Macroeconomic Risks under Zero Lower Bound ? ∗},
  author={Yuji Sakurai},
  year={2015}
}
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. In order to conduct a counterfactual analysis of monetary policy, I employ a standard New Keynesian macroeconomic model… CONTINUE READING