| Abstract |
We propose a shadow interest rate for structural macroeconomic models that measures the interest-rate-equivalent stance of monetary policy at the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance that extends the expected duration of zero interest-rate policy beyond the lower bound constraint is expansionary and decreases the shadow rate. Quantitative easing that shortens the expected duration of the binding constraint also decreases the shadow rate. We find that the estimated shadow federal funds rate from a workhorse structural model of the US economy better captures the stance of monetary policy than a shadow rate based only on the term structure of interest rates. Furthermore, both forward guidance and quantitative easing appear to be important drivers of our shadow federal funds rate. |