Revisiting Shadow Short-term Interest Rate Models: Evidence from the Ultra-Low Interest Rate Environment in Japan

Hiroyuki Oi, Shigenori Shiratsuka and Shunichi Yoneyama
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Hiroyuki Oi: Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: hiroyuki.ooi@boj.or.jp)
Shigenori Shiratsuka: Professor, Faculty of Economics, Keio University (E-mail: shigenori.shiratsuka@keio.jp)
Shunichi Yoneyama: Director, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail: shunichi.yoneyama@boj.or.jp)

No 26-E-06, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Shadow short-term interest rate (SSR) models are expected to provide effective monetary policy indicators under the effective lower bound (ELB) constraint on nominal interest rates. This paper revisits the SSR models using yield curve data from the prolonged ultra-low interest rate environment in Japan. Specifically, this paper compares the various specifications of the SSR models based on the Nelson-Siegel model by focusing on a trade-off between estimation performance and theoretical consistency. This paper highlights the importance of evaluating monetary policy easing effects using the entire yield curve fluctuations, rather than relying solely on SSR estimates, especially in the ultra-low interest rate environment in Japan.

Keywords: Effective lower bound constraint; Shadow short-term interest rates; Nelson-Siegel model; Monetary policy indicators (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 G12 (search for similar items in EconPapers)
Date: 2026-03
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