Arbeitspapier
Shadow-rate VARs
VARs are a popular tool for forecasting and structural analysis, but ill-suited to handle occasionally binding constraints, like the effective lower bound on nominal interest rates. We extend the VAR framework by modeling interest rates as censored observations of a latent shadow-rate process, and propose an efficient sampler for Bayesian estimation of such 'shadow-rate VARs.' We analyze specifications where actual and shadow rates serve as explanatory variables and find benefits of including both. In comparison to a standard VAR, shadow-rate VARs generate superior predictions for short- and long-term interest rates, and deliver some gains for macroeconomic variables in US data. Our structural analysis estimates economic responses to shocks in financial conditions, showing strong differences in the reaction of interest rates depending on whether the ELB binds or not. After an adverse shock, our shadow-rate VAR sees a stronger decline of economic activity at the ELB rather than when not.
- ISBN
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978-3-95729-945-1
- Language
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Englisch
- Bibliographic citation
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Series: Deutsche Bundesbank Discussion Paper ; No. 14/2023
- Classification
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Wirtschaft
Multiple or Simultaneous Equation Models: Truncated and Censored Models; Switching Regression Models
Forecasting Models; Simulation Methods
General Aggregative Models: Forecasting and Simulation: Models and Applications
Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
Interest Rates: Determination, Term Structure, and Effects
Money and Interest Rates: Forecasting and Simulation: Models and Applications
- Subject
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Macroeconomic forecasting
effective lower bound
term structure
censored observations
- Event
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Geistige Schöpfung
- (who)
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Carriero, Andrea
Clark, Todd E.
Marcellino, Massimiliano
Mertens, Elmar
- Event
-
Veröffentlichung
- (who)
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Deutsche Bundesbank
- (where)
-
Frankfurt a. M.
- (when)
-
2023
- Handle
- Last update
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10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Carriero, Andrea
- Clark, Todd E.
- Marcellino, Massimiliano
- Mertens, Elmar
- Deutsche Bundesbank
Time of origin
- 2023
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Large mixed-frequency VARs with a parsimonious time-varying parameter structure
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Below the zero lower bound: A shadow-rate term structure model for the euro area
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