Inferring the Shadow Rate from Real Activity

Abstract

We estimate a shadow rate consistent with the paths of time series capturing real activity. This allows us to quantify the real effects of unconventional monetary policy in terms of equivalent short-term interest rate movements. We find that large-scale asset purchases and forward guidance had significant real effects equivalent of up to a four percent reduction in the federal funds rate.

Keywords: effective lower bound, external instrument VAR, Kalman filter, shadow rate, unconventional monetary policy

JEL Classification: E43, E47, E52