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A Note of Caution on Shadow Rate Estimates

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  • LEO KRIPPNER

Abstract

Shadow short rate (SSR) estimates are generated regressors proposed as a proxy for policy interest rates during unconventional monetary policy (UMP) periods. However, using the Wu and Xia (2016) shadow/lower‐bound model, I show that SSR estimates can be sensitive to minor choices in their estimation. Used subsequently in a small macroeconomic model, those sensitivities lead to wide variations in the inferred effects of UMP on inflation and unemployment outcomes. Therefore, it should not be presumed that any SSR series will necessarily be quantitatively useful. Vetting SSR series allows appropriate SSR series to be retained within the suite of UMP indicators.

Suggested Citation

  • Leo Krippner, 2020. "A Note of Caution on Shadow Rate Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 951-962, June.
    • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:4:p:951-962
    DOI: 10.1111/jmcb.12613
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    References listed on IDEAS

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