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What do the shadow rates tell us about future inflation?

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  • Kuusela, Annika
  • Hännikäinen, Jari

Abstract

This paper investigates whether shadow interest rates contain predictive power for U.S. inflation in a data-rich environment. We find that shadow rates are useful leading indicators of inflation. Shadow rates contain substantial in-sample and out-of-sample predictive power for inflation in both the zero lower bound (ZLB) and non-ZLB periods. We find that the shadow rate suggested by Wu and Xia (2016) contains more information about future inflation than the shadow rate suggested by Krippner (2015b).

Suggested Citation

  • Kuusela, Annika & Hännikäinen, Jari, 2017. "What do the shadow rates tell us about future inflation?," MPRA Paper 80542, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:80542
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    File URL: https://mpra.ub.uni-muenchen.de/80542/1/MPRA_paper_80542.pdf
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    References listed on IDEAS

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    Cited by:

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    2. Rémi Odry & Roman Mestre, 2021. "Monetary Policy and Business Cycle Synchronization in Europe," EconomiX Working Papers 2021-19, University of Paris Nanterre, EconomiX.
    3. Christina Anderl & Guglielmo Maria Caporale, 2023. "Forecasting inflation with a zero lower bound or negative interest rates: Evidence from point and density forecasts," Manchester School, University of Manchester, vol. 91(3), pages 171-232, June.

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    More about this item

    Keywords

    shadow interest rates; zero lower bound; unconventional monetary policy; inflation forecasting; data-rich environment; factor models;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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