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A shadow rate New Keynesian model

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  • Ji Zhang

    (Tsinghua University)

  • Jing Cynthia Wu

    (University of Chicago)

Abstract

We propose a New Keynesian model with the shadow rate, which is the federal funds rate during normal times. At the zero lower bound, we establish empirically the negative shadow rate summarizes unconventional monetary policy with its resemblance to private interest rates, the Fed's balance sheet, and Taylor rule. Theoretically, we formalize our shadow rate New Keynesian model with QE and lending facilities. Our model generates data-consistent results: a negative supply shock is always contractionary. %Relatedly, the government multiplier is under 1. It also salvages the New Keynesian model from the zero lower bound induced structural break.

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  • Ji Zhang & Jing Cynthia Wu, 2017. "A shadow rate New Keynesian model," 2017 Meeting Papers 11, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:11
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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