This work uses term-structure models to analyse the determinants of the yield curve dynamics observed in the euro area in recent years. The analysis takes into account the existence of a lower bound on short-term interest rates, as well as the fact that investors might revise their expectations about the exact location of the bound. The models proposed in this work are estimated by using artificial intelligence techniques.
The results show that the strong decrease in long-term interest rates observed after the 2008 financial crisis is explained not only by the persistence of very low average inflation and growth rates, but also by the fact that market participants have progressively reduced their estimates of the lower bound on interest rates. Moreover, the risk premia requested by holders of long-term securities have significantly decreased.
Forthcoming in: Journal of Financial Econometrics
