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Shadow Rate Models and Monetary Policy

Author

Listed:
  • Ethan Struby

    (Carleton College)

  • Michael F. Connolly

    (Colgate University and Boston College)

Abstract

We examine the channels and efficacy of monetary policy at the zero lower bound (ZLB) through the lens of shadow rate models. We compare estimates across models with various factor structures and different assumptions about interest rate forecasts. We confirm that calendar-based forward guidance discretely shifted the implied duration of the ZLB and that large scale asset purchases (LSAPs) primarily lowered term premia. However, we find that the real effects of monetary policy are more muted relative to prior estimates: a 1 standard deviation fall in the shadow rate causes a peak decline in the unemployment rate of 0.003-0.01%.

Suggested Citation

  • Ethan Struby & Michael F. Connolly, 2022. "Shadow Rate Models and Monetary Policy," Working Papers 2022-03, Carleton College, Department of Economics.
    • Handle: RePEc:avv:wpaper:2022-03
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    File URL: https://digitalcommons.carleton.edu/cgi/viewcontent.cgi?article=1017&context=econ_repec
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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