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Global Dynamics at the Zero Lower Bound

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  • William T. Gavin
  • Benjamin D. Keen
  • Alexander W. Richter
  • Nathaniel A. Throckmorton

Abstract

This article presents global solutions to standard New Keynesian models with a zero lower bound (ZLB) constraint on the nominal interest rate. Rather than focus on specific sequences of shocks, we provide the solution for all combinations of technology and discount factor shocks and a thorough explanation of how dynamics change across the state space. Our solution method emphasizes accuracy to capture important expectational effects of going to and returning from the ZLB, which commonly used solution methods based on specific sequences of shocks cannot capture. We focus on the New Keynesian model without capital, but we also study the model with capital, with and without capital adjustment costs. Capital adds another mechanism for intertemporal substitution, which strengthens the expectational effects of the ZLB and impacts dynamics even before the ZLB is hit. We also evaluate how monetary policy affects the likelihood of hitting the ZLB. A policy rule based on a dual mandate is more likely to cause ZLB events when the central bank places greater emphasis on output stabilization.

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Bibliographic Info

Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2013-17.

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Date of creation: Oct 2013
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Handle: RePEc:abn:wpaper:auwp2013-17

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Fax: (334) 844-4615
Web page: http://cla.auburn.edu/economics/
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Keywords: Monetary Policy; Zero Lower Bound; Global Solution Method;

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References

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Citations

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Cited by:
  1. Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers 2013-028, Federal Reserve Bank of St. Louis.
  2. Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "The Zero Lower Bound: Frequency, Duration, and Numerical Convergence," Auburn Economics Working Paper Series auwp2014-09, Department of Economics, Auburn University.
  3. Yasuo Hirose & Atsushi Inoue, 2013. "Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," TERG Discussion Papers 308, Graduate School of Economics and Management, Tohoku University.
  4. Maria Lucia Florez-Jimenez & Julian A. Parra-Polania, 2014. "Forward guidance with an escape clause: When half a promise is better than a full one," BORRADORES DE ECONOMIA 011143, BANCO DE LA REPÚBLICA.
  5. Gauti Eggertsson & Andrea Ferrero & Andrea Raffo, 2013. "Can structural reforms help Europe?," International Finance Discussion Papers 1092, Board of Governors of the Federal Reserve System (U.S.).
  6. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander & Throckmorton, Nathaniel, 2013. "The stimulative effect of forward guidance," Working Papers 2013-38, Federal Reserve Bank of St. Louis, revised 30 Apr 2014.
  7. Viktors Ajevskis, 2013. "Non-Local Solutions to Dynamic Equilibrium Models: the Approximate Stable Manifolds Approach," Working Papers 2013/03, Latvijas Banka.
  8. Todd B. Walker & Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Auburn Economics Working Paper Series auwp2014-08, Department of Economics, Auburn University.

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