A shadow rate New Keynesian model

By Jing Cynthia Wu, Ji Zhang. Journal of Economic Dynamics and Control, 2016

118 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/81bb6ba16a68224dd7c86f3f6014dd9b1c70c9e9

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In Economics and Econometrics

Citations in the corpus

Evaluating Central Banks’ tool kit: Past, present, and future (2019, unknown): “See, for example, Swanson and Williams (2014), Wu and Xia (2016), Wu and Zhang (2017, 2019), Gaŕın, Lester and Sims (2019), Debortoli, Gaĺı and Gambetti (2016), Mouabbi and Sahuc (2017), and Swanson (2018a,b).”
Safety, Liquidity, and the Natural Rate of Interest (2017, methodology): “We assume that some of the observables equal the model’s implied value, plus an AR(1) exogenous process that captures either measurement error or some other source of discrepancy between the model and the data, as in Boivin and Giannoni (2006). For instance, these processes capture discrepancies bet”