A Shadow Policy Rate to Calibrate U.S. Monetary Policy at the Zero Lower Bound

The recent global financial crisis, the Great Recession, and the subsequent implementation of a variety of unconventional policy measures have raised the issue of how to correctly measure monetary policy when short-term nominal interest rates reach the zero lower bound (ZLB). In this paper, we propose a new "shadow policy rate" for the U.S. economy, using a large set of data representing the various facets of the U.S. Federal Reserve's policy actions. We document that our shadow rate tracks the effective federal funds rate very closely before the crisis. More importantly, it provides a reasonable gauge of monetary policy when the ZLB becomes binding. This facilitates the assessment of U.S. monetary policy stance against familiar Taylor-rule benchmarks. Finally, we show that in structural vector autoregressive (VAR) models, the shadow policy rate helps identify monetary policy shocks that better reflect the Federal Reserve's unconventional policy measures.