Working Paper: NBER ID: w22856
Authors: Jing Cynthia Wu; Ji Zhang
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: No keywords provided
JEL Codes: E12; E52; E58; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unconventional monetary policies (QE, lending facilities) (E52) | Economic outcomes (F69) |
| Shadow rate (Y60) | Economic outcomes (F69) |
| Shadow rate (Y60) | Unconventional monetary policies (QE, lending facilities) (E52) |
| Negative supply shock (E31) | Economic outcomes (F69) |
| Shadow rate (Y60) | Financial conditions indices (G21) |
| Shadow rate (Y60) | Federal Reserve's balance sheet (E52) |
| Shadow rate dynamics (C69) | Taylor rule (E43) |