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What do the shadow rates tell us about future inflation?

Kuusela, Annika and Hännikäinen, Jari (2017): What do the shadow rates tell us about future inflation?

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Abstract

This paper investigates whether shadow interest rates contain predictive power for U.S. inflation in a data-rich environment. We find that shadow rates are useful leading indicators of inflation. Shadow rates contain substantial in-sample and out-of-sample predictive power for inflation in both the zero lower bound (ZLB) and non-ZLB periods. We find that the shadow rate suggested by Wu and Xia (2016) contains more information about future inflation than the shadow rate suggested by Krippner (2015b).

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