A Shadow Rate Without a Lower Bound Constraint

Riksbank Research Paper Series No. 178

Sveriges Riksbank Working Paper Series No. 355

50 Pages Posted: 2 Nov 2018

See all articles by Annukka Ristiniemi

Annukka Ristiniemi

Sveriges Riksbank; Paris School of Economics (PSE)

Rafael Barros de Rezende

Stockholm School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018


We propose a shadow rate that measures the expansionary (contractionary) interest rate effects of unconventional monetary policies that are present when the lower bound is not binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro-area and the UK, and find that they fall (rise) when market participants expect monetary policy to become more expansionary (contractionary), and price this information into the yield curve. This ability of the shadow rate to track the stance of monetary policy is identified on announcements of policy rate cuts (hikes), balance sheet expansions (contractions) and forward guidance, with shadow rates responding timely, and in line with government bond yields. We show two applications for our shadow rate. First, we decompose shadow rate responses to monetary policy announcements into conventional and unconventional monetary policy surprises, and assess the pass-through of each type of policy to exchange rates. We find that exchange rates respond more to conventional than to unconventional monetary policy. Lastly, a counterfactual experiment in a DSGE model suggests that inflation in Sweden would have been around 0.47 percentage points lower had the Riksbank not used unconventional monetary policy since February 2015.

Keywords: unconventional monetary policy, monetary policy stance, term structure of interest rates, short-rate expectations, term premium

JEL Classification: E43, E44, E58, E52

Suggested Citation

Ristiniemi, Annukka and de Rezende, Rafael Barros, A Shadow Rate Without a Lower Bound Constraint (June 2018). Riksbank Research Paper Series No. 178, Sveriges Riksbank Working Paper Series No. 355, Available at SSRN: https://ssrn.com/abstract=3263500 or http://dx.doi.org/10.2139/ssrn.3263500

Annukka Ristiniemi (Contact Author)

Sveriges Riksbank ( email )

SE-103 37 Stockholm

HOME PAGE: http://www.ristiniemi.con

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014

Rafael Barros De Rezende

Stockholm School of Economics ( email )

Sveavägen 65, Stockholm (6th floor)
Box 6501 SE-113 83
Stockholm, SE-113 83

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