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A comment on Wu and Xia (2015), and the case for two-factor Shadow Short Rates

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  • Leo Krippner

Abstract

Shadow Short Rates (SSRs) estimated from shadow/lower-bound term structure models (SLMs) can be useful for monitoring of the stance of unconventional monetary policy and for quantitative analysis, but only if they are relatively robust. I show from several perspectives that SSRs from three-factor SLMs, which includes Wu and Xia (2015) SSRs, are not robust, and how that arises from the inherent flexibility of three-factor SLMs. Such SSRs should therefore be avoided. However, I also show that estimated SSRs from two-factor SLMs are relatively robust. Hence, two-factor SLM SSRs appear to be good candidates for monitoring and quantitative analysis, but ideally with appropriate robustness checks including alternative monetary policy metrics.

Suggested Citation

  • Leo Krippner, 2015. "A comment on Wu and Xia (2015), and the case for two-factor Shadow Short Rates," CAMA Working Papers 2015-48, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2015-48
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2016-01/48_2015_krippner.pdf
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    More about this item

    Keywords

    Shadow Short Rates; zero lower bound; unconventional monetary policy; term structure models;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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