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Zero Lower Bound and Parameter Bias in an Estimated DSGE Model

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  • Yasuo Hirose
  • Atsushi Inoue

Abstract

This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound constraint on the nominal interest rate. Our experiments show that most of the parameter estimates in a standard sticky-price DSGE model are not biased although some biases are detected in the estimates of the monetary policy parameters and the steady-state real interest rate. Nevertheless, in our baseline experiment, these biases are so small that the estimated impulse response functions are quite similar to the true impulse response functions. However, as the probability of hitting the zero lower bound increases, the biases in the parameter estimates become larger and can therefore lead to substantial differences between the estimated and true impulse responses.

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File URL: http://hdl.handle.net/10097/56549
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Bibliographic Info

Paper provided by Graduate School of Economics and Management, Tohoku University in its series TERG Discussion Papers with number 308.

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Length: 33 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:toh:tergaa:308

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  1. Christopher Gust & David Lopez-Salido & Matthew E. Smith, 2012. "The empirical implications of the interest-rate lower bound," Finance and Economics Discussion Series 2012-83, Board of Governors of the Federal Reserve System (U.S.).
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  7. Lars E.O. Svensson & Stefan Laseen, 2009. "Anticipated Alternative Instrument-Rate Paths in Policy Simulations," 2009 Meeting Papers 788, Society for Economic Dynamics.
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  14. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
  15. Richard Dennis, 2008. "Consumption-habits in a new Keynesian business cycle model," Working Paper Series 2008-35, Federal Reserve Bank of San Francisco.
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  17. R. Anton Braun & Lena Mareen Körber & Yuichiro Waki, 2012. "Some unpleasant properties of log-linearized solutions when the nominal rate is zero," Working Paper 2012-05, Federal Reserve Bank of Atlanta.
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