A Shadow Rate without a Lower Bound Constraint

48 Pages Posted: 1 Jun 2020

See all articles by Rafael B De Rezende

Rafael B De Rezende

Bank of England

Annukka Ristiniemi

Sveriges Riksbank; Paris School of Economics (PSE)

Multiple version iconThere are 2 versions of this paper

Date Written: May 22, 2020


We propose a shadow rate that measures the overall stance of monetary policy when the lower bound is not necessarily binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro area and the UK, and document that they fall (rise) as monetary policy becomes more expansionary (contractionary). 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 in a timely fashion, 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 half a percentage point lower had unconventional monetary policy not been used since February 2015.

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

JEL Classification: E43, E44, E58, E52

Suggested Citation

B De Rezende, Rafael and Ristiniemi, Annukka, A Shadow Rate without a Lower Bound Constraint (May 22, 2020). Bank of England Working Paper No. 864, Available at SSRN: https://ssrn.com/abstract=3610768 or http://dx.doi.org/10.2139/ssrn.3610768

Rafael B De Rezende (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Annukka Ristiniemi

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

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