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Identification at the Zero Lower Bound

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  • Sophocles Mavroeidis

Abstract

I show that the zero lower bound (ZLB) on interest rates can be used to identify the causal effects of monetary policy. Identification depends on the extent to which the ZLB limits the efficacy of monetary policy. I propose a simple way to test the efficacy of unconventional policies, modeled via a “shadow rate.” I apply this method to U.S. monetary policy using a three‐equation structural vector autoregressive model of inflation, unemployment, and the Federal Funds rate. I reject the null hypothesis that unconventional monetary policy has no effect at the ZLB, but find some evidence that it is not as effective as conventional monetary policy.

Suggested Citation

  • Sophocles Mavroeidis, 2021. "Identification at the Zero Lower Bound," Econometrica, Econometric Society, vol. 89(6), pages 2855-2885, November.
    • Handle: RePEc:wly:emetrp:v:89:y:2021:i:6:p:2855-2885
    DOI: 10.3982/ECTA17388
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    Cited by:

    1. Arai, Natsuki, 2023. "The FOMC’s new individual economic projections and macroeconomic theories," Journal of Banking & Finance, Elsevier, vol. 151(C).
    2. Guido Ascari & Sophocles Mavroeidis & Nigel McClung, 2023. "Coherence without Rationality at the ZLB," DEM Working Papers Series 212, University of Pavia, Department of Economics and Management.
    3. Daisuke Ikeda & Shangshang Li & Sophocles Mavroeidis & Francesco Zanetti, 2020. "Testing the Effectiveness of Unconventional Monetary Policy in Japan and the United States," IMES Discussion Paper Series 20-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Paul Beaudry & Fabrice Collard & Patrick Feve & Alain Guay & Franck Portier, 2022. "Dynamic Identification in VARs," Working Papers 22-08, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    5. Kirstin Hubrich & Daniel F. Waggoner, 2022. "The Transmission of Financial Shocks and Leverage of Financial Institutions: An Endogenous Regime-Switching Framework," FRB Atlanta Working Paper 2022-5, Federal Reserve Bank of Atlanta.
    6. Weale, Martin & Wieladek, Tomasz, 2022. "Financial effects of QE and conventional monetary policy compared," Journal of International Money and Finance, Elsevier, vol. 127(C).
    7. Ascari, Guido & Mavroeidis, Sophocles, 2022. "The unbearable lightness of equilibria in a low interest rate environment," Journal of Monetary Economics, Elsevier, vol. 127(C), pages 1-17.
    8. Carriero, Andrea & Clark, Todd E. & Marcellino, Massimiliano & Mertens, Elmar, 2023. "Shadow-rate VARs," Discussion Papers 14/2023, Deutsche Bundesbank.
    9. Ascari, Guido & Mavroeidis, Sophocles & McClung, Nigel, 2023. "Coherence without rationality at the zero lower bound," Journal of Economic Theory, Elsevier, vol. 214(C).
    10. Anna Bykhovskaya & James A. Duffy, 2022. "The Local to Unity Dynamic Tobit Model," Papers 2210.02599, arXiv.org, revised Feb 2023.

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