A Structural Measure of the Shadow Federal Funds Rate

We propose a shadow policy interest rate based on an estimated structural model that accounts
for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and
increases the shadow rate compared to an unconstrained systematic policy response. By
contrast, forward guidance and other unconventional policies that extend the expected duration
of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying
these distinct effects, our ‘structural’ shadow federal funds rate better captures the stance of
monetary policy for given economic conditions than a shadow rate based only on the term
structure of interest rates.