Real rates likely to move back up – BIS paper
Use of “shadow rate” allows authors to account for the effective lower bound
Real interest rates have trended down for several decades, but they could soon move back up, according to research published by the Bank for International Settlements.
Benjamin Johannsen and Elmar Mertens make use of a “shadow rate” – the rate that would hold in the absence of an effective lower bound – to control for monetary policy that was stuck at the lower bound for several years. Otherwise, they employ a “standard” econometric model of interest rates and macroeconomic variables.
They
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