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Nonlinear Adventures at the Zero Lower Bound

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

Abstract

Motivated by the recent experience of the U.S. and the Eurozone, we 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, we find that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, we 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18058.

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Date of creation: May 2012
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Handle: RePEc:nbr:nberwo:18058

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  1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262100711, December.
  2. Grey Gordon, 2011. "Code for "Computing Dynamic Heterogeneous-Agent Economies: Tracking the Distribution"," QM&RBC Codes, Quantitative Macroeconomics & Real Business Cycles 186, Quantitative Macroeconomics & Real Business Cycles.
  3. Kenneth L. Judd & Lilia Maliar & Serguei Maliar, 2011. "Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models," Quantitative Economics, Econometric Society, Econometric Society, vol. 2(2), pages 173-210, 07.
  4. 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, Elsevier, vol. 35(2), pages 229-239, February.
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  1. > Macroeconomics > Monetary Theory
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