What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices

This paper analyzes the effects of lower bound for interest rates on distributions inflation and rates. In a New Keynesian model with bound, two equilibria emerge: policy is mostly unconstrained in “target equilibrium,” whereas constrained “liquidity trap equilibrium.” Using options data inflation, we find forecast densities consistent target equilibrium no evidence favor liquidity equilibrium. The has sizable effect distribution rates, but its impact relatively modest. (JEL E12, E23, E31, E43, E52, G13)