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Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

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  • S. Borağan Aruoba
  • Pablo Cuba-Borda
  • Frank Schorfheide

Abstract

We propose and solve a small-scale New-Keynesian model with Markov sunspot shocks that move the economy between a targeted-inflation regime and a deflation regime and fit it to data from the U.S. and Japan. For the U.S. we find that adverse demand shocks have moved the economy to the zero lower bound (ZLB) in 2009 and an expansive monetary policy has kept it there subsequently. In contrast, Japan has experienced a switch to the deflation regime in 1999 and remained there since then, except for a short period. The two scenarios have drastically different implications for macroeconomic policies. Fiscal multipliers are about 20% smaller in the deflationary regime, despite the economy remaining at the ZLB. While a commitment by the central bank to keep rates near the ZLB doubles the fiscal multipliers in the targeted-inflation regime (U.S.), it has no effect in the deflation regime (Japan).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19248.

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Date of creation: Jul 2013
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Handle: RePEc:nbr:nberwo:19248

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Citations

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Cited by:
  1. Armenter, Roc, 2013. "The perils of nominal targets," Working Papers 14-2, Federal Reserve Bank of Philadelphia.
  2. Kaufmann, Daniel & Bäurle, Gregor, 2013. "Exchange Rate and Price Dynamics at the Zero Lower Bound," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79872, Verein für Socialpolitik / German Economic Association.
  3. Yasuo Hirose & Atsushi Inoue, 2013. "Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," TERG Discussion Papers, Graduate School of Economics and Management, Tohoku University 308, Graduate School of Economics and Management, Tohoku University.
  4. Campbell Leith & Ding Liu, 2014. "The in‡flation bias under Calvo and Rotemberg pricing," Working Papers, Business School - Economics, University of Glasgow 2014_06, Business School - Economics, University of Glasgow.
  5. William T. Gavin & Benjamin D. Keen & Alexander Richter & Nathaniel Throckmorton, 2013. "Global dynamics at the zero lower bound," Working Papers, Federal Reserve Bank of St. Louis 2013-007, Federal Reserve Bank of St. Louis.
  6. Yasuo Hirose, 2014. "An Estimated DSGE Model with a Deflation Steady State," CAMA Working Papers 2014-52, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "The Zero Lower Bound: Frequency, Duration, and Numerical Convergence," Auburn Economics Working Paper Series, Department of Economics, Auburn University auwp2014-09, Department of Economics, Auburn University.
  8. Todd B. Walker & Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Auburn Economics Working Paper Series, Department of Economics, Auburn University auwp2014-08, Department of Economics, Auburn University.
  9. Julien Albertini & Arthur Poirier, 2014. "Unemployment benefits extensions at the zero lower bound on nominal interest rate," SFB 649 Discussion Papers SFB649DP2014-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  10. S. Boragan Aruoba & Luigi Bocola & Frank Schorfheide, 2013. "Assessing DSGE model nonlinearities," Working Papers 13-47, Federal Reserve Bank of Philadelphia.
  11. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander & Throckmorton, Nathaniel, 2013. "The stimulative effect of forward guidance," Working Papers, Federal Reserve Bank of St. Louis 2013-38, Federal Reserve Bank of St. Louis, revised 30 Apr 2014.

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