The Empirical Implications of the Interest-Rate Lower Bound

Gust, Christopher J.; Herbst, Edward P.; López‐Salido, David; Smith, Matthew

doi:10.2139/ssrn.2197515

Cited by 121 publications

(229 citation statements)

References 33 publications

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“…Using artificial data from a linear New Keynesian model that uses news shocks to impose the ZLB, Hirose and Inoue (2016) find that ignoring the ZLB biases the parameter estimates as the frequency and duration of ZLB events increases. Gust et al (2016) estimate a nonlinear model with U.S. data to show the empirical implications of the ZLB constraint. They stress the importance of using nonlinear estimation techniques by comparing the posterior distributions and impulse responses from the nonlinear and linear models.…”

Section: Introductionmentioning

confidence: 99%

Are Nonlinear Methods Necessary at the Zero Lower Bound?

Richter¹,

Throckmorton²

2016

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This paper examines the importance of using nonlinear methods to account for the zero lower bound (ZLB) on the Fed's policy rate. We estimate three models with a particle filter: (1) a nonlinear model with a ZLB constraint; (2) a constrained linear model that imposes the constraint in the filter but not the solution; and (3) an unconstrained linear model that never imposes the constraint. The linear models have a lower likelihood than the nonlinear model when the Fed is constrained and predict large monetary policy shocks during the ZLB period. We also compare the predictions from our nonlinear model to the quasi-linear solution with OccBin. OccBin captures the ZLB much better than the linear solutions but it still generates less endogenous volatility than the nonlinear model and it is not as conducive to estimation. Finally, we extend the baseline model to include a banking sector. We find larger differences between the predictions from the nonlinear model and both the linear and quasi-linear models.

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Section: Introductionmentioning

confidence: 99%

Are Nonlinear Methods Necessary at the Zero Lower Bound?

Richter¹,

Throckmorton²

2016

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“…Conditional on being in the targeted-inflation regime, the dynamics are very similar to the dynamics that arise in the targeted-inflation equilibrium, that is studied in, for instance, Maliar and Maliar (2015), Fernández-Villaverde et al (2015), and Gust et al (2012).…”

Section: Identifying the Regime (Targeted-inflation Versus Deflation)mentioning

confidence: 75%

“…In terms of solution method, our work is most closely related to the papers by Judd et al (2010), Maliar and Maliar (2015), Fernández-Villaverde et al (2015), and Gust et al (2012).…”

Section: Identifying the Regime (Targeted-inflation Versus Deflation)mentioning

confidence: 99%

“…With respect to the empirical analysis, the only other papers that combine a projection solution with a nonlinear filter to track U.S. data throughout the Great Recession period are Gust et al (2012) and Cuba-Borda (2014). Both papers restrict their attention to the targeted-inflation equilibrium.…”

Section: Identifying the Regime (Targeted-inflation Versus Deflation)mentioning

confidence: 99%

“…While Chebyshev polynomials, which are smooth functions of the states, can in principle approximate functions with a kink, such approximations are quite inaccurate for low-order polynomials. Thus, unlike Judd et al (2010), Fernández-Villaverde et al (2015, and Gust et al (2012), we use a piece-wise smooth approximation of the functions π(S t ) and E(S t ) by postulating …”

Section: Solution Algorithmmentioning

confidence: 99%

See 2 more Smart Citations

Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

Aruoba¹,

Cuba‐Borda

Schorfheide

2016

Int. finance discuss. pap.

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We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S. JEL CLASSIFICATION: C5, E4, E5

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The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model

Hirose

Inoue

2015

J. Appl. Econ.

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This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound (ZLB) constraint on the nominal interest rate. Our Monte Carlo experiments using a standard sticky-price DSGE model show that no significant bias is detected in parameter estimates and that the estimated impulse response functions are quite similar to the true ones. However, as the frequency of being at the ZLB or the duration of ZLB spells increases, the parameter bias becomes larger and therefore leads to substantial differences between the estimated and true impulse responses.It is also demonstrated that the model missing the ZLB causes biased estimates of structural shocks even with the virtually unbiased parameters.

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The Empirical Implications of the Interest-Rate Lower Bound

Cited by 121 publications

References 33 publications

Are Nonlinear Methods Necessary at the Zero Lower Bound?

Are Nonlinear Methods Necessary at the Zero Lower Bound?

Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model

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