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Implementing the zero lower bound in an estimated regime-switching DSGE model

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Abstract

The Zero Lower Bound (ZLB) on policy rates is one of the key monetary policy issues du jour. In this paper we investigate the problem of modelling and estimating the ZLB in a simple New Keynesian model with regime switches. The key features of the model include switches in the time preference shock, productivity growth rate and the steady state rate of inflation leading to two steady states: a normal steady state and a ZLB steady state. The model is tted to US data using Bayesian methods and is found to match the US experience over the great moderation and the ZLB periods very well. The key features of the model allow us to test competing theories about the determinants of the ZLB steady state. Our results suggest that the ZLB steady state is driven by precautionary savings behavior. It is also found that expectations over different regimes crucially matter for the dynamics of the system.

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  • Andrew Binning & Junior Maih, 2016. "Implementing the zero lower bound in an estimated regime-switching DSGE model," Working Paper 2016/3, Norges Bank.
    • Handle: RePEc:bno:worpap:2016_03
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    Cited by:

    1. Andrew Binning & Junior Maih, 2016. "Forecast uncertainty in the neighborhood of the effective lower bound: How much asymmetry should we expect?," Working Paper 2016/13, Norges Bank.
    2. Masolo, Riccardo M. & Winant, Pablo E., 2019. "The Stochastic Lower Bound," Economics Letters, Elsevier, vol. 180(C), pages 54-57.
    3. Binning, Andrew & Bjørnland, Hilde C. & Maih, Junior, 2019. "Is monetary policy always effective? Incomplete interest rate pass-through in a DSGE model," Working Paper 2019/22, Norges Bank.
    4. Girstmair, Stefan, 2024. "The effect of new housing supply in structural models: a forecasting performance evaluation," Working Paper Series 2895, European Central Bank.
    5. Farooq Akram & Andrew Binning & Junior Maih, 2016. "Joint Prediction Bands for Macroeconomic Risk Management," Working Papers No 5/2016, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    6. Karamé, Frédéric, 2018. "A new particle filtering approach to estimate stochastic volatility models with Markov-switching," Econometrics and Statistics, Elsevier, vol. 8(C), pages 204-230.
    7. Thore Kockerols & Erling Motzfeldt Kravik & Yasin Mimir, 2021. "Leaning against persistent financial cycles with occasional crises," Working Paper 2021/11, Norges Bank.
    8. Tolga Özden, 2021. "Heterogeneous Expectations and the Business Cycle at the Effective Lower Bound," Working Papers 714, DNB.
    9. Andrew Binning & Junior Maih, 2017. "Modelling Occasionally Binding Constraints Using Regime-Switching," Working Papers No 9/2017, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    10. Kulish, Mariano & Morley, James & Robinson, Tim, 2017. "Estimating DSGE models with zero interest rate policy," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 35-49.

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    Keywords

    Zero Lower Bound; Regime-switching; DSGE; Bayesian Estimation;
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