Abstract
Regardless of whether the federal funds target rate has lifted off from the zero lower bound, the historical record of interest rates will be forever marred by the lack of variation in the aftermath of the great recession. This paper employs a method of indirect inference to analyze the interplay between unemployment rates, leading indicators and interest rates in an environment with near-zero interest rates. This method is used to estimate a decision tree for state-dependent Federal Reserve policy to estimate an alternative target rate series similar to those predicted by a shadow rate model.
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Notes
Note that the series changed from a target rate to a range on Dec 16, 2008. A change of 75 b.p. was recorded on that date, measuring the change from the target rate to the lower bound of the range.
Tenfold cross-validation was employed as a countermeasure against overfitting.
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The authors are grateful for helpful feedback from Edda Claus and from seminar participants at the 2015 annual meeting of the Canadian Economics Association, and from the helpful comments of two anonymous referees, which led to substantial improvements from the original manuscript. All errors are the responsibility of the authors.
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Morin, L., Shang, Y. Federal Reserve policy after the zero lower bound: an indirect inference approach. Empir Econ 60, 2105–2124 (2021). https://doi.org/10.1007/s00181-020-01824-4
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DOI: https://doi.org/10.1007/s00181-020-01824-4
Keywords
- Federal Reserve
- Target rate
- Zero lower bound
- Classification trees
- Indirect inference
- Simulated minimum distance