Discussion Paper Series 2018-E-5

A Survey-based Shadow Rate and Unconventional Monetary Policy Effects

Hibiki Ichiue, Yoichi Ueno

Many studies estimate a shadow interest rate, which can be negative when the short-term rate is at the effective lower bound, and use it as the monetary policy indicator. This study proposes a novel method to estimate the shadow rate using survey forecasts of macroeconomic variables and allowing the shadow rate to be negative even when the short-term rate is positive. The estimated U.S. shadow rate remained negative in 2015-17, when the Federal Reserve continued to hike its policy rate but kept its holdings of assets at sizable levels. The shadow spread, which is defined as the shadow rate minus the short-term rate, is negatively correlated with the Federal Reserve's holdings of assets, particularly mortgage-backed securities. The impact of the unconventional monetary policy on inflation was 0.5 percentage points at its peak.

Keywords: Monetary Policy; Effective Lower Bound; Zero Lower Bound; Shadow Rate; Survey Forecasts

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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