A Shadow Rate New Keynesian Model / Jing Cynthia Wu, Ji Zhang.

Format:

Book

Author/Creator:

Wu, Jing Cynthia.

Contributor:

National Bureau of Economic Research.

Zhang, Ji.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22856.

NBER working paper series no. w22856

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

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.

Notes:

Print version record

November 2016.