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Economic Quarterly

First Quarter 2019

How Likely Is the Zero Lower Bound?

Thomas A. Lubik and Christian Matthes

We estimate the probability that the federal funds rate will be at or below the zero lower bound over a ten-year time horizon. We do so by specifying and estimating a time-varying parameter vector autoregressive model for key US macroeconomic aggregates. Based on the estimated model, we generate a distribution of future outcomes from which we compute such probabilities. We find that the zero lower bound probability ranges between 15 percent and 30 percent in the longer term depending on the specific measure used. In the near term, this probability is effectively zero. Robustness checks for historic episodes suggest that the TVP-VAR captures the underlying dynamics well and that it would have put substantial likelihood on the interest rate being at the zero lower bound during 2009-14.

 

*An updated version of this paper, with a correction to footnote 1, was posted on October 24, 2019.

DOI: https://doi.org/10.21144/eq1050102

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