Unconventional Monetary Policies and the Yield Curve: Estimating Non-Affine Term Structure Models with Unspanned Macro Risk by Factor Extraction

We show how the factor extraction approach to estimating the Gaussian term structure model can be modified to handle the interest rate lower bound without the approximations used in other approaches. This drastically reduces the computation time and produces more robust estimates of the lower bound parameter and the shadow rate. It makes feasible the extensive specification search necessary to allow for unspanned factors as in , allowing the term structure model to be used to better assess the effects of policy on the term premium and market expectations. (JEL G12, C13, E43) Received June 28, 2022; editorial decision May 12, 2023 by Editor Hui Chen