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A shadow rate New Keynesian model

Author

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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Cited by:

    1. repec:eee:inecon:v:118:y:2019:i:c:p:200-216 is not listed on IDEAS
    2. Atsushi Inoue & Barbara Rossi, 2018. "The effects of conventional and unconventional monetary policy: A new approach," Economics Working Papers 1638, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    4. Fève, Patrick & Moura, Alban & Pierrard, Olivier, 2019. "Shadow Banking and the Great Recession: Evidence from an Estimated DSGE Model," TSE Working Papers 19-996, Toulouse School of Economics (TSE).
    5. Wu, Jing Cynthia & Zhang, Ji, 2019. "Global effective lower bound and unconventional monetary policy," Journal of International Economics, Elsevier, vol. 118(C), pages 200-216.
    6. Fang Yao & Margarita Rubio, 2017. "Macroprudential policies in a low interest-rate environment," Reserve Bank of New Zealand Discussion Paper Series DP2017/04, Reserve Bank of New Zealand.
    7. Benjamin K. Johannsen & Elmar Mertens, 2016. "A Time Series Model of Interest Rates With the Effective Lower Bound," Finance and Economics Discussion Series 2016-033, Board of Governors of the Federal Reserve System (US).
    8. Hashmat Khan & Louis Phaneuf & Jean Gardy Victor, 2018. "Rules-Based Monetary Policy and the Threat of Indeterminacy When Trend Inflation is Low," Carleton Economic Papers 18-08, Carleton University, Department of Economics, revised 08 Mar 2019.
    9. Barbara Rossi, 2018. "Identifying and estimating the effects of unconventional monetary policy in the data: How to do It and what have we learned?," Economics Working Papers 1641, Department of Economics and Business, Universitat Pompeu Fabra.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • 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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