Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?


Glenn D. Rudebusch

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2013-39 | December 1, 2013

Recent U.S. Treasury yields have been constrained to some extent by the zero lower bound (ZLB) on nominal interest rates. In modeling these yields, we compare the performance of a standard affine Gaussian dynamic term structure model (DTSM), which ignores the ZLB, and a shadow-rate DTSM, which respects the ZLB. We find that the standard affine model is likely to exhibit declines in fit and forecast performance with very low interest rates. In contrast, the shadow-rate model mitigates ZLB problems significantly and we document superior performance for this model class in the most recent period.

Article Citation

Rudebusch, Glenn D., and Jens H. E. Christensen. 2013. “Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?,” Federal Reserve Bank of San Francisco Working Paper 2013-39. Available at

About the Author
Jens Christensen
Jens Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Jens Christensen