Measuring the Impact of Unconventional Monetary Policies on the U.S. Banking and Bond Markets at the Lower Bound

The effects of credit and monetary policy shocks are analyzed using a shadow rate model of the Eurodollar (ED) and Treasury bond markets. This model uses three factors common to both markets and two spread factors that capture the term structure of the rate differential. The results show that the policy initiatives that followed the Lehman default in 2008 were much more effective in restraining risk premiums in banking markets than in the Treasury market and that, besides the shadow policy rate, the shadow ED rate is a useful indicator of the effect of default risk on the economy.