A shadow rate without a lower bound constraint

Rafael B De Rezende () and Annukka Ristiniemi
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Rafael B De Rezende: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Authors registered in the RePEc Author Service: Rafael B. De Rezende ()

No 864, Bank of England working papers from Bank of England

Abstract: We propose a shadow rate that measures the overall stance of monetary policy when the lower bound is not necessarily binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro area and the UK, and document that they fall (rise) as monetary policy becomes more expansionary (contractionary). 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 in a timely fashion, 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 half a percentage point lower had unconventional monetary policy not been used since February 2015.

Keywords: Monetary policy stance; unconventional monetary policy; term structure of interest rates; short-rate expectations; term premium; exchange rates (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2020-05-22
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: A shadow rate without a lower bound constraint (2023)
Working Paper: A shadow rate without a lower bound constraint (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0864

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