We study the transmission of changes in the believed location of the lower bound to longterm
interest rates since the introduction of negative interest rate policies. The expectations
hypothesis of the term structure combined with a lower bound on policy rates suggests that
normal policy transmission is reduced when policy rates approach this lower bound. We
show that if market participants revise downward the believed location of the lower bound,
this may in itself reduce long-term yields. Moreover, normal policy transmission to long-term
rates increases. A cross-country event study suggests that such effects have been empirically
relevant during the recent negative interest rate episode.
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