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A Structural Measure of the Shadow Federal Funds Rate

Author

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  • Callum Jones
  • Mariano Kulish
  • James Morley

Abstract

We propose a shadow interest rate for structural macroeconomic models that measures the interest-rate-equivalent stance of monetary policy at 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 that extends the expected duration of zero-interest-rate policy beyond the lower bound constraint is expansionary and decreases the shadow rate. Quantitative easing that shortens the expected duration of the binding constraint also decreases the shadow rate. We find that the estimated shadow federal funds rate from a workhorse structural model of the US economy better captures the stance of monetary policy than a shadow rate based only on the term structure of interest rates. Furthermore, both forward guidance and quantitative easing appear to be important drivers of our shadow federal funds rate.

Suggested Citation

  • Callum Jones & Mariano Kulish & James Morley, 2024. "A Structural Measure of the Shadow Federal Funds Rate," Working Papers 2024-05, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2024-05
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    References listed on IDEAS

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    Cited by:

    1. Carriero, Andrea & Clark, Todd E. & Marcellino, Massimiliano & Mertens, Elmar, 2023. "Shadow-rate VARs," Discussion Papers 14/2023, Deutsche Bundesbank.

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    More about this item

    Keywords

    zero lower bound; forward guidance; quantitative easing; shadow rate; monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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