Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273726 
Year of Publication: 
2023
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 14/2023
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
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.
Subjects: 
Macroeconomic forecasting
effective lower bound
term structure
censored observations
JEL: 
C34
C53
E17
E37
E43
E47
ISBN: 
978-3-95729-945-1
Document Type: 
Working Paper

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