A Structural Measure of the Shadow Federal Funds Rate
54 Pages Posted: 9 Mar 2023
Date Written: October 2022
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: Suggested Citation