A Calibration of the Shadow Rate to the Euro Area Using Genetic Algorithms

Eric McCoy and Ulrich Clemens

No 51, European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: In the face of the lower bound on interest rates, central banks have relied on unconventional policy tools such as large-scale asset purchases and forward guidance to try to affect long-term interest rates and provide monetary stimulus to the economy. Assessing the impact of these measures and summarising the overall stance of monetary policy in this new environment has proven to be a challenge for academics and central banks. As a result, researchers have worked on modifying current term structure models and have adapted them to the current situation of close to zero or even negative interest rates. The paper begins by providing a non-technical overview of Leo Krippner's two-factor shadow rate model (K-ANSM2), explaining the underlying mechanics of the model through an illustrative example. Thereafter, the paper presents the results obtained from calibrating Krippner's KANSM2 shadow rate model to the euro area using genetic algorithms and discusses the pros and the cons of using genetic algorithms as an alternative to the optimisation method currently used (Nelder-Mead optimisation routine). Finally, the paper ends by analysing the strengths and weaknesses of using the shadow short rate as a tool to illustrate the stance and the dynamics of monetary policy.

JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-07
New Economics Papers: this item is included in nep-cmp, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:dispap:051

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