This paper presents a regime-switching model of the yield curve with two states. One is a normal state, the other is a zero-bound state that represents the case when the monetary policy target rate is at its zero lower bound for a prolonged period. The model delivers estimates of the time-varying probability of exiting the zero-bound state, and it outperforms standard three- and four-factor term structure models as well as a shadow rate model at matching short-rate expectations and the compression in yield volatility near the zero lower bound.
H. E. Christensen, Jens. 2013. “A Regime-Switching Model of the Yield Curve at the Zero Bound,” Federal Reserve Bank of San Francisco Working Paper 2013-34. Available at https://doi.org/10.24148/wp2013-34