Lower Bound Uncertainty and Long‐Term Interest Rates.

Nominal interest rates are constrained by an effective lower bound, but the level of the lower bound is uncertain. This paper uses a simple shadow rate term structure model to study how lower bound uncertainty affects long‐term interest rates. A decline in lower bound uncertainty, in the sense of a mean‐preserving contraction, is associated with a drop in expected short rates. The effect on the variance of short rates, and hence the term premium, is ambiguous. A calibration to Canadian data suggests that a decline in lower bound uncertainty is associated with a modest drop in interest rates. [ABSTRACT FROM AUTHOR]