Bank of Lithuania

No 14. Rasa Stasiukynaitė. Understanding monetary policy stance


The paper discusses monetary policy stance assessment in times of both conventional and unconventional monetary policy. Prior to the financial crisis, many central banks had one primary target and one instrument, the short-term rate. Over the years there was a consensus that the rule-of-thumb characterization known as the Taylor rule could broadly outline the policy and supplement discretionary policy. In the post-crisis period, one instrument was no longer sufficient and unconventional measures, such as large-scale asset purchases and forward guidance, were put in the policy makers’ agendas. Therefore, assessing the impact of the implemented unconventional measures and understanding the overall monetary policy stance in traditional ways no longer suffices, while finding new suitable ways is not an easy task. The shadow rate literature is able to circumvent the lower bound constraint and incorporate the monetary policy accommodation provided by the asset purchase programmes. However, application of the shadow rate estimates, in order to assess monetary policy stance, has to be done with caution since the estimates lack robustness.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Rasa Stasiukynaitė, unconventional monetary policy, shadow rates, monetary policy stance, equilibrium real rate of interest, Taylor rule