A Structural Measure of the Shadow Federal Funds Rate

54 Pages Posted: 9 Mar 2023

See all articles by Callum Jones

Callum Jones

Board of Governors of the Federal Reserve System

Mariano Kulish

The University of Sydney; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

James Morley

University of Sydney - School of Economics

Date Written: October 2022

Abstract

We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our ‘structural’ shadow federal funds rate better captures the stance of monetary policy for given economic conditions than a shadow rate based only on the term structure of interest rates.

Keywords: zero lower bound; forward guidance; shadow rate; monetary policy

JEL Classification: E52; E58

Suggested Citation

Jones, Callum and Kulish, Mariano and Morley, James, A Structural Measure of the Shadow Federal Funds Rate (October 2022). Available at SSRN: https://ssrn.com/abstract=4247517 or http://dx.doi.org/10.2139/ssrn.4247517

Callum Jones

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mariano Kulish

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

James Morley (Contact Author)

University of Sydney - School of Economics ( email )

Rm 607 Social Sciences Building
The University of Sydney
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

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