A Shadow Policy Rate to Calibrate US Monetary Policy at the Zero Lower Bound

28 Pages Posted: 24 Jun 2014

See all articles by Marco J. Lombardi

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Feng Zhu

Bank for International Settlements (BIS)

Date Written: June 2014

Abstract

The recent global financial crisis, the Great Recession and the subsequent implementation of a variety of unconventional policy measures have raised the issue of how to correctly measure the stance of monetary policy when policy interest rates reach the zero lower bound (ZLB). In this paper, we propose a new "shadow policy rate" for the US economy, using a large set of data representing the various facets of the US Federal Reserve's policy stance. Changes in term premia at various maturities and asset purchases by the Fed are key drivers of this shadow rate. We document that our shadow policy rate tracks the effective federal funds rate very closely before the recent crisis. More importantly, it provides a reasonable gauge of US monetary policy stance when the ZLB becomes binding. This facilitates the assessment of the policy stance against familiar Taylor rule benchmarks. Finally, we show that in structural vector autoregressive (VAR) models, the shadow policy rate helps identify monetary policy shocks that better reflect the Federal Reserve's unconventional policy measures.

Keywords: unconventional monetary policy, zero lower bound, shadow policy rate, federal funds rate, dynamic factor model, monetary VAR

JEL Classification: E52, E58, C38, C82

Suggested Citation

Lombardi, Marco Jacopo and Zhu, Feng, A Shadow Policy Rate to Calibrate US Monetary Policy at the Zero Lower Bound (June 2014). BIS Working Paper No. 452. Available at SSRN: https://ssrn.com/abstract=2458015

Marco Jacopo Lombardi (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Feng Zhu

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41 61 280 9158 (Phone)
+41 61 280 9100 (Fax)

HOME PAGE: http://pantheon.yale.edu/~fz9

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