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A shadow rate New Keynesian model

Jing Cynthia Wu () and Ji Zhang

Journal of Economic Dynamics and Control, 2019, vol. 107, issue C, -

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.

Keywords: Shadow rate; New Keynesian model; Unconventional monetary policy; Zero lower bound; QE; Lending facilities (search for similar items in EconPapers)
Date: 2019
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Working Paper: A shadow rate New Keynesian model (2017) Downloads
Working Paper: A Shadow Rate New Keynesian Model (2016) Downloads
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DOI: 10.1016/j.jedc.2019.103728

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