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Abstract:
We examine the channels and efficacy of monetary policy at the zero lower bound (ZLB) through the lens of various shadow rate models. Our key methodological contribution is to extend the discretization filter to incorporate missing observations. This allows us to estimate shadow rate models that both incorporate survey forecasts and allow for departures from rational expectations. The models disagree about the level of the shadow rate and the duration of the ZLB in real time, but they are remarkably consistent in terms of their implications for the effects and channels of policy across a number of structural and reduced-form exercises. Particularly, they attribute most of the effects of major Federal Reserve policy announcements to changes in term premia, and imply that large scale asset purchases affected term premia both by changes in average duration and changes in local supply of substitute assets.
Citation
Ethan Struby & Michael F. Connolly, 2026. “Shadow Rate Models and Monetary Policy,” Working Papers 2022-03, Carleton College, Department of Economics.
@TechReport{CS_shadowrates,
title = {Shadow Rate Models and Monetary Policy},
author = {Connolly, Michael F. and Struby, Ethan},
year = {2026},
institution={Carleton College, Department of Economics},
type={Working Papers},
number={2022-03}