BIS paper uses ‘shadow rate’ to study market expectations

The Bank for International Settlements, Basel
The Bank for International Settlements
Photo: Ulrich Roth

Research published by the Bank for International Settlements presents a new approach to estimating market expectations on negative interest rates using the concept of a “shadow rate”.

The approach outlined by Fan Dora Xia and Jing Cynthia Wu in their working paper draws on the idea of a “shadow rate” – a hypothetical short-term interest rate that would hold if rates were not constrained by a lower bound. Their paper differs from others in studying the eurozone and allowing the lower bound to

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