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Measuring Exchange Rate, Price, and Output Dynamics at the Effective Lower Bound

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  • Gregor Bäurle
  • Daniel Kaufmann

Abstract

New Keynesian models with sticky prices make stark predictions about how the economy responds to shocks under different monetary policy regimes when short‐term interest rates are constrained by an effective lower bound. We use the Swiss case as a laboratory to find evidence in favour of these predictions. We propose a Bayesian VAR to estimate impulse responses to risk shocks for short periods with a binding effective lower bound and with a publicly announced minimum exchange rate. In line with predictions from theory, we find that with a binding effective lower bound, the responses of the exchange rate, prices, and output become more persistent. However, the minimum exchange rate attenuates this adverse impact.

Suggested Citation

  • Gregor Bäurle & Daniel Kaufmann, 2018. "Measuring Exchange Rate, Price, and Output Dynamics at the Effective Lower Bound," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 80(6), pages 1243-1266, December.
  • Handle: RePEc:bla:obuest:v:80:y:2018:i:6:p:1243-1266
    DOI: 10.1111/obes.12260
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    Cited by:

    1. Fabio Canetg & Daniel Kaufmann, 2019. "Shocking Interest Rate Floors," IRENE Working Papers 19-02, IRENE Institute of Economic Research.

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