A Shadow Rate New Keynesian Model

57 Pages Posted: 28 Sep 2016 Last revised: 22 Oct 2018

See all articles by Jing Cynthia Wu

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Ji Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 8, 2017

Abstract

We propose a tractable and coherent framework that captures both conventional and unconventional monetary policies with the shadow fed funds rate. Empirically, we document the shadow rate's resemblance to an overall financial conditions index, various private interest rates, the Fed's balance sheet, and the Taylor rule. Theoretically, we demonstrate the impact of unconventional policies, such as QE and lending facilities, on the economy is identical to that of a negative shadow rate, making the latter a useful summary statistic for these policies. Our model generates the data consistent result: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break.

Keywords: shadow rate, New Keynesian model, unconventional monetary policy, zero lower bound, QE, lending facilities

Suggested Citation

Wu, Jing Cynthia and Zhang, Ji, A Shadow Rate New Keynesian Model (August 8, 2017). Chicago Booth Research Paper No. 16-18, Available at SSRN: https://ssrn.com/abstract=2843627 or http://dx.doi.org/10.2139/ssrn.2843627

Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ji Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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