Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data

Abstract

The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald's (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. However, in line with the predictions of the basic model, positive productivity shocks have a stronger negative effect on inflation at the ZLB.

Measuring Exchange Rate, Price, and Output Dynamics at the Effective Lower Bound

“…Garín et al . (), however, argue that a key implication of the New Keynesian model is at odds with the data because positive technology shocks are still expansionary when the ELB is binding. As one possibility for their finding, and in line with our results, they mention that the basic New Keynesian model does not take into account non‐conventional policy measures that ameliorate the ELB constraint.…”

“…(). Moreover, empirical work by Garín, Lester and Sims () raises doubt about key implications of the New Keynesian model when the ELB is binding…”

“…The power of such commitments is controversial, however, and has been called into question in theoretical work by Del Negro, Giannoni and Patterson (2012), McKay, Nakamura and Steinsson (2016), Carlstrom, Fuerst and Paustian (2015) and Levin et al (2010). Moreover, empirical work by Garín, Lester and Sims (2018) raises doubt about key implications of the New Keynesian model when the ELB is binding. 2 Ultimately, whether these theoretical predictions are accurate is an empirical question.…”

“…5 In line with our results, Caggiano, Castelnuovo and Pellegrino (2017) find that the ELB exacerbates the impact of risk shocks on real activity. Garín et al (2018), however, argue that a key implication of 4 This does not necessarily imply that constant-parameter VARs are inappropriate for analysing the Japanese or US cases. Wu and Xia (2016) find no significant changes in VAR coefficients when the ELB started to be binding in the US.…”

“…Cook and Devereux, ) while the empirical literature mostly identifies conventional and non‐conventional monetary policy shocks (see e.g. Baumeister and Benati, ; Weale and Wieladek, ; Wu and Xia, ), as well as technology shocks (see Garín et al ., ).…”