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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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Keywords: Monetary Policy; Zero Lower Bound; Global Solution Method;

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Citations

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Cited by:
  1. 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.
  2. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
  3. 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.
  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. 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.
  6. Viktors Ajevskis, 2013. "Non-Local Solutions to Dynamic Equilibrium Models: the Approximate Stable Manifolds Approach," Working Papers 2013/03, Latvijas Banka.
  7. 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.
  8. Campbell Leith & Ding Liu, 2014. "The in‡flation bias under Calvo and Rotemberg pricing," Working Papers 2014_06, Business School - Economics, University of Glasgow.
  9. Plante, Michael D. & Richter, Alexander & Throckmorton, Nathaniel, 2014. "The zero lower bound and endogenous uncertainty," Working Papers 1405, Federal Reserve Bank of Dallas.
  10. Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers 2013-028, Federal Reserve Bank of St. Louis.

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