Measuring The Impact of Unconventional Monetary Policies on The Us Banking and Bond Markets At The Lower Bound

The effects of credit and monetary policy shocks at the lower bound are analysed using a shadow rate term structure model of the Euro-Dollar interest rate futures and Treasury bond markets. This model uses three factors that are common to both markets and two spread factors that capture the term structure of the rate differential. It shows that, as intended, the policy initiatives that followed the Lehman failure were much more effective in restraining risk premiums in banking markets than in the Treasury market, which has been the focus of previous studies. Modelling these two markets jointly rather than just the Treasury market greatly increases the precision with which the shadow policy rate is estimated. Our results show that the shadow Eurodollar rate is a useful indicator of the effect of default risk on the economy