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Nonlinear adventures at the zero lower bound

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  • Jesús Fernández-Villaverde
  • Grey Gordon
  • Pablo Guerrón-Quintana
  • Juan F. Rubio-Ramírez

Abstract

Motivated by the recent experience of the U.S. and the Eurozone, the authors describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, the authors found that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, the authors document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probabilty distributions of the duration of a spell at the ZLB; 3) the responses of output to government expenditure shocks at the ZLB, 4) the distribution of shocks that send the economy to the ZLB; and 5) the distribution of shocks that keep the economy at the ZLB.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-10.

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Date of creation: 2012
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Handle: RePEc:fip:fedpwp:12-10

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Keywords: Keynesian economics ; Nonlinear theories ; Interest rates;

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  1. Grey Gordon, 2011. "Code for "Computing Dynamic Heterogeneous-Agent Economies: Tracking the Distribution"," QM&RBC Codes 186, Quantitative Macroeconomics & Real Business Cycles.
  2. Malin, Benjamin A. & Krueger, Dirk & Kubler, Felix, 2011. "Solving the multi-country real business cycle model using a Smolyak-collocation method," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 229-239, February.
  3. Kenneth Judd & Lilia Maliar & Serguei Maliar, 2011. "Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models," Working Papers. Serie AD 2011-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
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  1. > Macroeconomics > Monetary Theory
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