Browsing by Author "Pekkarinen, Teemu"

This thesis examines the lower bounds on nominal interest rates by constructing models for an agent's portfolio optimisation problem of risk-free assets. The question “is there a lower bound on nominal interest rates, and is it zero” is approached theoretically by considering the situation where a depositor decides whether to keep her money in a bank account or turn the deposits into cash or some other cash-equivalent. The two-period and multi-period models presented in this paper are applicable for examining the lower bounds on commercial bank deposit rates and central bank policy rates. The multi-period model with a stochastic cash holding cost function provides a new framework and tool for the yields of risk-free assets. By using this model, it is possible to simulate asset returns and thereby approach the lower bounds on deposit rates. The results indicate that the lower bound on nominal interest rates is negative.