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We use options data on future interest rates and inflation to study whether the decrease in the natural rate of interest leads to forecast densities consistent with the theoretical model.We develop a lower bound indicator that captures the effects of the lower bound on the distribution of interest rates. federal funds rate on cross-border bank lending in a given period depends on the prevailing international capital flows regime and on the level of the two main components of the federal funds rate: macro fundamentals and monetary policy stance.Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets.The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one.
Quantitatively, while the lower bound has a sizable effect on the distribution of future interest rates, its impact on forecast densities for inflation is relatively modest. In contrast, during episodes of stagnant growth in bank lending from advanced to emerging economies, the relationship between the federal funds rate and bank lending is negative, mainly due to the monetary policy stance component of the federal funds rate.
What is the aggregate real rate of return in the economy?
Is it higher than the growth rate of the economy and, if so, by how much?
The data since the start of the ZLB episode in 2008.
Q4 are best described as a mixture of the two local equilibria.