Shadow Rates Shock Measures in Local Projections Analysis

Abstract: As the Federal Reserve has hit the zero lower bound for the federal funds rate in policy making, shadow rate estimates have gained popularity for monetary policy analysis. This letter investigates the effects of using alternative monetary policy shock estimates obtained from different shadow rate measures. Specifically, macroeconomic responses to shadow rate monetary policy shock measures are estimated using local projections. The results indicate even more evidence in support of using shadow rates during periods that the Federal Reserve reached the zero lower bound in its federal funds rate target. Keywords: Monetary policy, zero lower bound, monetary policy shocks, shadow rates JEL Classification Numbers: E40, E43, E52, E5