The Empirical Relevance of the Shadow Rate and the Zero Lower Bound

This paper investigates the evolution of unconventional monetary policies under a binding zero lower bound (ZLB) constraint for the U.S. economy. In doing so, this study provides a comprehensive empirical assessment on the economic and statistical implications of allowing conventional and unconventional monetary policies to work in mutually exclusive union using shadow rates. Shadow rate Taylor rules and policy counterfactuals implied by time-varying coefficient structural vector autoregression (VAR) models show: (i) one can reconcile plausible economic results using shadow rates when short-term interest rates approach the ZLB and (ii) unconventional monetary policies are a viable response to recession and facilitate stability during economic recovery