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Title: Subjective shadow rates at the zero lower bound Authors:  Ethan Struby - Carleton College (United States) [presenting]
Michael Connolly - Colgate University (United States)
Abstract: Shadow rates during the 2008-15 zero lower bound (ZLB) period are estimated using forward rates on US Treasuries and forecasts of short term interest rates from the Blue Chip Financial Survey. We estimate a suite of models with two- and three-factor structures, with and without forecast data, and alternatively assuming forecasts are full information rational expectations (FIRE) forecasts or distorted. Our estimates imply deeper easing (relative to previous estimates) by the Federal Reserve during the ZLB period relative to previous estimates. Still, only the distorted-forecast model matches the Federal Reserve's real-time statements about the timing of increased policy rates prior to 2014. We revisit how monetary policy affected asset prices and risk premia during the crisis and find (1) all but one specification finds evidence of a structural break in the effects of monetary policy before and after the Great Recession (2) The model with distorted forecasts attributes more variance of yields to the expected path of short-term rates than models that assume FIRE and (3) term premia appear to have been affected through changes in duration risk or the slope of the yield curve rather than scarcity of medium-term assets.