Nonlinear adventures at the zero lower bound

Abstract

a b s t r a c tIn this paper, we argue for the importance of explicitly considering nonlinearities in analyzing the behavior of the New Keynesian model with a zero lower bound (ZLB) of the nominal interest rate. To show this, we report how the decision rules and the equilibrium dynamics of the model are substantially affected by the nonlinear features brought about by the ZLB. We also illustrate a tension between the length of a spell at the ZLB and the drop in consumption there.

The Transmission Mechanism in Good and Bad Times

“…Our results offer empirical support for the notion that the real effects of monetary policy (and any other shock that propagates through the real rate of interest) during expansions are qualitatively and quantitatively different from the real effects during contractions. Together with the building evidence from time-varying coefficient VARs (Cogley and Sargent, 2005;Primiceri, 2005) and time-varying coefficient DSGE models (Fernández-Villaverde and Rubio-Ramirez, 2008;Bianchi, 2013), our findings call for introducing parameter instability in more structural general equilibrium analyses in a way that could help identify the source(s) of asymmetry in the transmission mechanism during good and bad times. APPENDIX A.1.…”

“…Results are robust to alternative strategies to model state-dependent parameters. .2 Although recent advances have made it possible to solve structural models that feature a zero bound for the nominal interest rate (see Fernández-Villaverde et al, 2012), we are not aware of contributions that have estimated this type of nonlinearity in the context of a DSGE model. 1237 C (2015) by the…”

The Output and Welfare Effects of Government Spending Shocks Over the Business Cycle

“…Nakata (2016) reaches a similar conclusion that it is optimal to increase government spending when the zero lower bound binds. Fernández-Villaverde et al (2015) analyze the consequences of the inherent nonlinearity induced by the presence of the zero lower bound and highlight potential pitfalls with linear approximations. Eggertsson and Singh (2016), in contrast, argue that the differences between nonlinear and linear solutions at the zero lower bound in a textbook New Keynesian model are modest.…”

“…Our model features far too many state variables for it to be feasible to adopt a fully global solution methodology. Fernández-Villaverde et al (2015) consider a fully nonlinear solution of a textbook New Keynesian model without capital. Although their model is simpler than ours and their solution methodology more complex, some of our results about state dependence in a passive monetary policy regime echo their findings.…”

Using Adaptive Sparse Grids to Solve High-Dimensional Dynamic Models

“…The adaptivity of the grid now ensures that grid points are placed close to the kinks while the grid remains coarse where policy functions are smoother. Other important potential applications where kinks in policy functions naturally occur are models with collateral constraints on borrowing (see, e.g., Khan and Thomas (2013), Brumm, Grill, Kubler, and Schmedders (2015)) or with the zero lower bound on the nominal interest rate (see, e.g., Fernández-Villaverde, Gordon, Guerrón-Quintana, and Rubio-Ramirez (2015), Maliar and Maliar (2015)).…”