A Shadow Rate New Keynesian Model

Jing Cynthia Wu and Ji Zhang

No 22856, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a tractable and coherent framework that captures both conventional and unconventional monetary policies with the shadow fed funds rate. Empirically, we document the shadow rate's resemblance to an overall financial conditions index, various private interest rates, the Fed's balance sheet, and the Taylor rule. Theoretically, we demonstrate the impact of unconventional policies, such as QE and lending facilities, on the economy is identical to that of a negative shadow rate, making the latter a useful summary statistic for these policies. Our model generates the data-consistent result: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break.

JEL-codes: E12 E52 E58 E63 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (6)

Published as Jing Cynthia Wu & Ji Zhang, 2019. "A Shadow Rate New Keynesian Model," Journal of Economic Dynamics and Control, .

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Journal Article: A shadow rate New Keynesian model (2019)
Working Paper: A shadow rate New Keynesian model (2017)
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