We propose a regime-switching approach to deal with the lower bound on nominal interest rates in dynamic term structure modelling. In the "lower bound regime", the short term rate is expected to remain constant at levels close to the effective lower bound; in the "normal regime", the short rate...

This paper proposes the use of the two-factor term-structure model of Longstaff and Schwartz (1992a,LS) to estimate the risk-neutral density (RND) of the futur short-term interest rate. The resulting RND can be interpreted as the market´s estimate of the density of the future short-term...

We analyze the properties of the natural rate of interest in an economy where nominal debt contracts generate a spread between loan rates and the policy interest rate. In our model, monetary policy has real effects in the flexible-price equilibrium, because it affects the credit spread. Relying...