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The empirical implications of the interest-rate lower bound

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  • Christopher Gust
  • David Lopez-Salido
  • Matthew E. Smith

Abstract

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. Compared with the hypothetical situation in which monetary policy can act in an unconstrained fashion, our estimates imply that U.S. output was more than 1 percent lower, on average, over the 2009-2011 period. Moreover, around 20 percent of the drop in U.S. GDP during the recession of 2008-2009 was due to the interest-rate lower bound. We show that the estimated model generates lower bound episodes that resemble salient characteristics of the observed U.S. episode, including its expected duration.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-83.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-83

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  1. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
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Cited by:
  1. Yasuo Hirose & Atsushi Inoue, 2013. "Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," Departmental Working Papers 1306, Southern Methodist University, Department of Economics.
  2. 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.
  3. William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "Global Dynamics at the Zero Lower Bound," Auburn Economics Working Paper Series auwp2013-17, Department of Economics, Auburn University.
  4. Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal Stimulus and Distortionary Taxation," Working Papers 2011-005, Becker Friedman Institute for Research In Economics.
  5. Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "The Zero Lower Bound: Frequency, Duration, and Determinacy," Auburn Economics Working Paper Series auwp2013-16, Department of Economics, Auburn University.
  6. S. Boragan Aruoba & Frank Schorfheide, 2013. "Macroeconomic dynamics near the ZLB: a tale of two equilibria," Working Papers 13-29, Federal Reserve Bank of Philadelphia.
  7. Taisuke Nakata, 2013. "Uncertainty at the zero lower bound," Finance and Economics Discussion Series 2013-09, Board of Governors of the Federal Reserve System (U.S.).
  8. S. Boragan Aruoba & Luigi Bocola & Frank Schorfheide, 2013. "Assessing DSGE model nonlinearities," Working Papers 13-47, Federal Reserve Bank of Philadelphia.

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