Unconventional Monetary Policies and Consumer Consumption: The Role of Shadow Short Rates

ABSTRACT This article examines the effectiveness of short‐term interest rate indicators in predicting consumer consumption in the United States amidst a changing monetary policy landscape marked by unconventional monetary policies, such as near‐zero interest rates and quantitative easing. The study explores whether the shadow short rate (SSR), derived from the shadow rate term structure model, can serve as a more robust and informative predictor by capturing the effects of unconventional policies. The analysis also incorporates monetary policy uncertainty (MPU) as an additional factor to account for its potential influence on consumption behavior. Utilizing the permanent income model as a theoretical framework, the study employs a nonlinear least squares model for the analysis. It analyses quarterly data from the United States from 1990 to 2019. The findings indicate that short‐term interest rate indicators are less effective in predicting consumer consumption in the current economic environment, where unconventional monetary policies have influenced the relationship between interest rates and consumer consumption. In contrast, the SSR demonstrates a more consistent performance in predicting consumer consumption in the United States. The MPU coefficient is positive but statistically insignificant, suggesting limited direct impact in this context.