October 2021

A Structural Measure of the Shadow Federal Funds Rate

Callum Jones, Mariano Kulish, James Morley

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 given economic conditions than a shadow rate based only on the term structure of interest rates.

DOI: https://doi.org/10.17016/FEDS.2021.064

PDF: Full Paper

Related Materials: Accessible materials (.zip)

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Last Update: October 07, 2021