A Comment on Wu and Xia (2015), and the Case for Two-Factor Shadow Short Rates

38 Pages Posted: 19 Dec 2015 Last revised: 30 Jan 2016

Date Written: December 1, 2015

Abstract

Shadow Short Rates (SSRs) estimated from shadow/lower-bound term structure models (SLMs) can be useful for monitoring of the stance of unconventional monetary policy and for quantitative analysis, but only if they are relatively robust. I show from several perspectives that SSRs from three-factor SLMs, which includes Wu and Xia (2015) SSRs, are not robust, and how that arises from the inherent flexibility of three-factor SLMs. Such SSRs should therefore be avoided. However, I also show that estimated SSRs from two-factor SLMs are relatively robust. Hence, two-factor SLM SSRs appear to be good candidates for monitoring and quantitative analysis, but ideally with appropriate robustness checks including alternative monetary policy metrics.

Keywords: Shadow Short Rates, zero lower bound, unconventional monetary policy, term structure models

JEL Classification: E43, G12, G13

Suggested Citation

Krippner, Leo, A Comment on Wu and Xia (2015), and the Case for Two-Factor Shadow Short Rates (December 1, 2015). CAMA Working Paper No. 48/2015, Available at SSRN: https://ssrn.com/abstract=2705222 or http://dx.doi.org/10.2139/ssrn.2705222

Leo Krippner (Contact Author)

Reserve Bank of New Zealand ( email )

2 The Terrace
PO Box 2498
Wellington, 6140
New Zealand

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