Open AccessA Structural Measure of the Shadow Federal Funds Rate
Author(s) -
Callum Jones,
Mariano Kulish,
James Morley
Publication year - 2021
Publication title -
finance and economics discussion series
Language(s) - English
Resource type - Journals
eISSN - 2767-3898
pISSN - 1936-2854
DOI - 10.17016/feds.2021.064
Subject(s) - shadow (psychology) , federal funds , interest rate , zero lower bound , economics , monetary policy , constraint (computer aided design) , monetary economics , shadow price , econometrics , mathematics , psychology , geometry , mathematical optimization , psychotherapist
We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.