PAPERS & NOTES

We propose a shadow rate without a lower bound constraint that measures the overall stance of monetary policy in any policy environment, prior and during the lower-bound period, as well as in the current “New Normal” environment, where unconventional monetary policies have become more standard. Using daily yield curve data shadow rates are estimated for the US, Sweden, the euro area and the UK, and fall (rise) as monetary policy becomes more expansionary (contractionary), following announcements of policy rate cuts (hikes), forward guidance, and balance sheet expansions (contractions). In one first application for the shadow rate, we decompose shadow rate responses to monetary policy announcements into conventional and unconventional monetary policy surprises, and find that exchange rates respond more to conventional than to unconventional monetary policy. Lastly, counterfactual experiments in two DSGE models suggest that inflation in the US and in Sweden would have been lower than otherwise had unconventional monetary policy not been used to stimulate both economies.