Nonlinear Estimation of a New Keynesian Model with Endogenous Inflation De-Anchoring

We estimate a New Keynesian model that allows endogenous transitions between a target equilibrium, with inflation fluctuating around the central bank’s target and interest rates typically positive, and a low-inflation equilibrium, where the effective lower bound binds and de-anchored expectations keep inflation persistently below target. The model is estimated using Bayesian methods, employing an ensemble MCMC sampler with a particle filter to handle nonlinearities. We find that the United States remained in the target equilibrium after the global financial crisis, the euro area transitioned to the low-inflation equilibrium in 2015, with the subsequent inflation surge initiating a return to the target equilibrium in 2021, and Japan entered the low-inflation equilibrium in the early 2000s. Bayes factors strongly favor the equilibrium-transition model over an alternative specification in which the lower bound binds only occasionally and expectations remain anchored.