Macroeconomic dynamics near the ZLB: a tale of two equilibria
AbstractThis paper studies the dynamics of a New Keynesian dynamic stochastic general equilibrium (DSGE) model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targeted-inflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targeted-inflation and a deflation regime. We use the particle filter to estimate the state of the U.S. economy during and after the 2008-09 recession under the assumptions that the U.S. economy has been in either the targeted-inflation or the sunspot equilibrium. We consider a combination of fiscal policy (calibrated to the American Recovery and Reinvestment Act) and monetary policy (that tries to keep interest rates near zero) and compute government spending multipliers. Ex-ante multipliers (cumulative over one year) under the targeted-inflation regime are around 0.9. A monetary policy that keeps interest rates at zero can raise the multiplier to 1.7. The ex-post (conditioning on the realized shocks in 2009-11) multiplier is estimated to be 1.3. Conditional on the sunspot equilibrium, the multipliers are generally smaller and the scope for conventional expansionary monetary policy is severely limited.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-29.
Date of creation: 2013
Date of revision:
Other versions of this item:
- S. Borağan Aruoba & Frank Schorfheide, 2013. "Macroeconomic Dynamics Near the ZLB: A Tale of Two Equilibria," NBER Working Papers 19248, National Bureau of Economic Research, Inc.
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-05 (All new papers)
- NEP-CBA-2013-08-05 (Central Banking)
- NEP-DGE-2013-08-05 (Dynamic General Equilibrium)
- NEP-MAC-2013-08-05 (Macroeconomics)
- NEP-MON-2013-08-05 (Monetary Economics)
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