Abstract
This paper studies the transmission of changes in short-term interest rates to longer-term government bond yields when interest rates are at very low levels or negative. We focus on Switzerland, where short-term interest rates have been at zero since late 2008 and negative since the beginning of 2015. The expectations hypothesis of the term structure implies that as nominal interest rates approach their lower bound, the effect of short-term rates on longer-term yields should decline, and positive short rate changes should have larger absolute effects than negative short rate changes. Contrary to studies of other countries, we find no evidence for a decline in the effect of short rate changes for the low-interest rate period using Swiss data. However, we do find evidence for the predicted asymmetric effect for positive and negative short rate changes during the period when short-term rates are close to zero. This asymmetry normalized again after the introduction of negative interest rates.
Highlights
In the past few years, several central banks have moved their policy rates into negative territory
In the precrisis sample, which lasts until the lower bound of the target range for the Swiss National Bank (SNB) for the Swiss franc 3-month Libor reaches zero, we find no statistically significant difference between the impacts of negative and positive short rate changes on long-term interest rates
This paper studies the transmission of changes in shortterm interest rates to longer-term government bond yields when short-term rates are close to zero or negative, focusing on Switzerland
Summary
In the past few years, several central banks have moved their policy rates into negative territory. In the precrisis sample, which lasts until the lower bound of the target range for the Swiss National Bank (SNB) for the Swiss franc 3-month Libor reaches zero, we find no statistically significant difference between the impacts of negative and positive short rate changes on long-term interest rates. The results for the zero lower bound period are consistent with the asymmetric effects of positive and negative short-rate changes that are predicted by the Ruge-Murcia (2006) model. This was the first time that the mid-point of the SNB’s target range for the 3-month Swiss franc Libor became negative To achieve this lowering of short-term money market rates into negative territory, the SNB introduced negative interest on banks’ sight deposits held by the SNB (the equivalent of central bank reserves) and simultaneously announced that it would be set at − 0.25%.
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