IDEAS home Printed from https://ideas.repec.org/p/hhs/rbnkwp/0355.html
   My bibliography  Save this paper

A shadow rate without a lower bound constraint

Author

Listed:
  • De Rezende, Rafael B.

    () (Monetary Policy Department, Central Bank of Sweden)

  • Ristiniemi, Annukka

    () (Financial Stability Department, Central Bank of Sweden)

Abstract

We propose a shadow rate that measures the expansionary (contractionary) interest rate effects of unconventional monetary policies that are present when the lower bound is not binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro-area and the UK, and find that they fall (rise) when market participants expect monetary policy to become more expansionary (contractionary), and price this information into the yield curve. 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 timely, 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 0.47 percentage points lower had the Riksbank not used unconventional monetary policy since February 2015.

Suggested Citation

  • De Rezende, Rafael B. & Ristiniemi, Annukka, 2018. "A shadow rate without a lower bound constraint," Working Paper Series 355, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0355
    as

    Download full text from publisher

    File URL: https://www.riksbank.se/globalassets/media/rapporter/working-papers/2018/no.355-a-shadow-rate-without-a-lower-bound-constraint
    File Function: Full text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Scott Joslin & Kenneth J. Singleton & Haoxiang Zhu, 2011. "A New Perspective on Gaussian Dynamic Term Structure Models," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 926-970.
    2. Don Bredin & Stuart Hyde & Dirk Nitzsche & Gerard O'Reilly, 2009. "European monetary policy surprises: the aggregate and sectoral stock market response," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 156-171.
    3. Reinder Haitsma & Deren Unalmis & Jakob de Haan, 2016. "The Impact of the ECB�s Conventional and Unconventional Monetary Policies on Stock Markets," Working Papers 1605, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    4. Kim, Chang-Jin & Nelson, Charles R., 2006. "Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex post data," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1949-1966, November.
    5. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, vol. 110(1), pages 110-138.
    6. Reuven Glick & Sylvain Leduc, 2018. "Unconventional Monetary Policy and the Dollar: Conventional Signs, Unconventional Magnitudes," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 103-152, December.
    7. Kortela, Tomi, 2016. "A shadow rate model with time-varying lower bound of interest rates," Research Discussion Papers 19/2016, Bank of Finland.
    8. Guangye Cao & Andrew Foerster, 2013. "Expectations of large-scale asset purchases," Economic Review, Federal Reserve Bank of Kansas City, issue qii, pages 5-29.
    9. Joyce, Michael A. S. & Relleen, Jonathan & Sorensen, Steffen, 2008. "Measuring monetary policy expectations from financial market instruments," Working Paper Series 978, European Central Bank.
    10. Jens H. E. Christensen & Glenn D. Rudebusch, 2012. "The Response of Interest Rates to US and UK Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 385-414, November.
    11. Don H Kim & Athanasios Orphanides, 2007. "The bond market term premium: what is it, and how can we measure it?," BIS Quarterly Review, Bank for International Settlements, June.
    12. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    13. De Rezende, Rafael B., 2017. "The interest rate effects of government bond purchases away from the lower bound," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 165-186.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ankargren, Sebastian & Shahnazarian, Hovick, 2019. "The Interaction Between Fiscal and Monetary Policies: Evidence from Sweden," Working Paper Series 365, Sveriges Riksbank (Central Bank of Sweden), revised 01 Apr 2019.
    2. Corbo, Vesna & Di Casola, Paola, 2018. "Conditional exchange rate pass-through: evidence from Sweden," Working Paper Series 352, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    unconventional monetary policy; monetary policy stance; term structure of interest rates; short-rate expectations; term premium;

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:rbnkwp:0355. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lena Löfgren). General contact details of provider: http://edirc.repec.org/data/rbgovse.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.