The term structure of macroeconomic risks at the effective lower bound

This paper proposes a new macro-finance model that solves the tension between tractability, flexibility in macroeconomic dynamics, and consistency of the term structures of treasury yields with the effective lower bound (ELB). I use the term structures of U.S. nominal and real treasury yields from 1990 to explore the interdependence between inflation expectations, volatility, and monetary policy at the ELB. The estimation reveals that real yields stay elevated during the ELB due to large premia and deflation fears, produced by a persistent shift in inflation dynamics, with low average inflation and heightened inflation volatility.