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The (ir)relevance of the nominal lower bound for real yield curve analysis

I propose a new term structure model for euro area real and nominal interest rates which explicitly incorporates a time-varying lower bound for nominal interest rates. Results suggest that the lower bound is of importance in structural analyses implying time-varying impulse responses of yield components. With short-term rate expectations at or close to the lower bound, premium components are less reactive to a typical 10 bp increase in inflation, while real rate responses change their sign from positive to negative.