The Shadow Rate Model: Let’s Make it Real!

Adam Golinski, Sophie Guilloux-Nefussi and Jean-Paul Renne

Working papers from Banque de France

Abstract: This paper expands upon conventional shadow rate models, which typically concentrate on the term structure of nominal yields, by integrating real interest rates. Close to zero-lower bound periods, real rates inherit part of the non-linearity stemming from the constraints that apply to nominal rates. We introduce a specific macro-finance adaptation of our real/nominal shadow rate model and apply it to U.S. data spanning the last five decades. We exploit the model to calculate real and nominal term premiums and to examine how the dynamic responses of real and nominal rates to economic shocks are constrained during zero-lower bound periods.

Keywords: Shadow Rate; Real and Nominal Risk Premiums; Yield Curve (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 E58 G12 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2025
New Economics Papers: this item is included in nep-mon
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https://www.banque-france.fr/system/files/2025-10/WP1014.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:1014

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