Federal Reserve policy after the zero lower bound: an indirect inference approach

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.