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

Author

Listed:
  • Glenn Rudebusch

    (Federal Reserve Bank of San Francisco)

  • Michael Bauer

    (Federal Reserve Bank of San Francisco)

Abstract

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
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    References listed on IDEAS

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    Cited by:

    1. Christina Anderl & Guglielmo Maria Caporale, 2023. "Shadow rates as a measure of the monetary policy stance: Some international evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(5), pages 399-422, November.
    2. Rasa Stasiukynaite, 2017. "Understanding Monetary Policy Stance," Bank of Lithuania Occasional Paper Series 14, Bank of Lithuania.

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