A shadow rate without a lower bound constraint

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 22 May 2020

Staff Working Paper No. 864

By Rafael B De Rezende and Annukka Ristiniemi

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.

PDFA shadow rate without a lower bound constraint

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