A comment on Wu and Xia (2015), and the case for two-factor Shadow Short Rates

Leo Krippner

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Shadow Short Rates (SSRs) estimated from shadow/lower-bound term structure models (SLMs) can be useful for monitoring of the stance of unconventional monetary policy and for quantitative analysis, but only if they are relatively robust. I show from several perspectives that SSRs from three-factor SLMs, which includes Wu and Xia (2015) SSRs, are not robust, and how that arises from the inherent flexibility of three-factor SLMs. Such SSRs should therefore be avoided. However, I also show that estimated SSRs from two-factor SLMs are relatively robust. Hence, two-factor SLM SSRs appear to be good candidates for monitoring and quantitative analysis, but ideally with appropriate robustness checks including alternative monetary policy metrics.

Keywords: Shadow Short Rates; zero lower bound; unconventional monetary policy; term structure models (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-12
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2015-48

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