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On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint

Author

Listed:
  • Davide Debortoli
  • Jordi Galí
  • Luca Gambetti

Abstract

We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the US economy (the 2009Q1–2015Q4 period). We focus on two dimensions of economic performance that were ex ante likely to have been affected by a binding ZLB: (i) the volatility of macro variables and (ii) the economy’s response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation, and the long-term interest rate were hardly affected by the binding ZLB constraint. We show how a shadow interest rate rule (which we take as a proxy for forward guidance) can reconcile our empirical findings with the predictions of a simple New Keynesian model with a ZLB constraint.

Suggested Citation

  • Davide Debortoli & Jordi Galí & Luca Gambetti, 2020. "On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint," NBER Macroeconomics Annual, University of Chicago Press, vol. 34(1), pages 141-170.
    • Handle: RePEc:ucp:macann:doi:10.1086/707177
    DOI: 10.1086/707177
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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