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Nonlinear adventures at the zero lower bound

Author

Listed:
  • Fernández-Villaverde, Jesús
  • Gordon, Grey
  • Guerrón-Quintana, Pablo
  • Rubio-Ramírez, Juan F.

Abstract

In this paper, we argue for the importance of explicitly considering nonlinearities in analyzing the behavior of the New Keynesian model with a zero lower bound (ZLB) of the nominal interest rate. To show this, we report how the decision rules and the equilibrium dynamics of the model are substantially affected by the nonlinear features brought about by the ZLB. We also illustrate a tension between the length of a spell at the ZLB and the drop in consumption there.

Suggested Citation

  • Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 182-204.
  • Handle: RePEc:eee:dyncon:v:57:y:2015:i:c:p:182-204
    DOI: 10.1016/j.jedc.2015.05.014
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    More about this item

    Keywords

    Zero lower bound; New Keynesian models; Nonlinear solution methods;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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