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Nonlinear Adventures at the Zero Lower Bound

  • Fernández-Villaverde, Jesús
  • Gordon, Grey
  • Guerron-Quintana, Pablo A.
  • Rubio-Ramírez, Juan Francisco

Motivated by the recent experience of the U.S. and the Eurozone, we describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, we find that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, we document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probabilty distributions of the duration of a spell at the ZLB; 3) the responses of output to government expenditure shocks at the ZLB, 4) the distribution of shocks that send the economy to the ZLB; and 5) the distribution of shocks that keep the economy at the ZLB.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8972.

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Date of creation: May 2012
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Handle: RePEc:cpr:ceprdp:8972
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