IDEAS home Printed from
   My bibliography  Save this paper

The Shadow Rate, Taylor Rules, and Monetary Policy Lift-off


  • Glenn Rudebusch

    (Federal Reserve Bank of San Francisco)

  • Michael Bauer

    (Federal Reserve Bank of San Francisco)


When the policy rate is constrained by the zero lower bound (ZLB), a new set of tools is needed to answer crucial questions about monetary policy, regarding the impact of the ZLB, expected lift-off, and the appropriateness of the policy stance. We document the shortcomings of affine dynamic term structure models (DTSMs) at the ZLB, and the benefits of shadow rate DTSMs. Using these we are able to appropriately answer the questions of interest: First, over recent years U.S. monetary policy has become increasingly constrained by the zero bound. Second, we estimate that in December 2012 the expected duration of the period of near-zero policy rates was 33 months, in line with survey-based and private-sector forecasts. Third, incorporating macroeconomic information in ZLB models is beneficial, improving inference about future policy, and allowing us to derive model-based Taylor rules and the resulting policy prescriptions. We find that in December 2012 the stance of monetary policy was in line with the desired stance based on simple policy rules.

Suggested Citation

  • Glenn Rudebusch & Michael Bauer, 2013. "The Shadow Rate, Taylor Rules, and Monetary Policy Lift-off," 2013 Meeting Papers 691, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:691

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    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. Black, Fischer, 1995. " Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-1376, December.
    3. Yoichi Ueno & Naohiko Baba & Yuji Sakurai, 2006. "The Use of the Black Model of Interest Rates as Options for Monitoring the JGB Market Expectations," Bank of Japan Working Paper Series 06-E-15, Bank of Japan.
    4. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco.
    5. 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.
    6. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, February.
    7. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:red:sed013:691. 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: (Christian Zimmermann). General contact details of provider: .

    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.