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Zero Lower Bound and Parameter Bias in an Estimated DSGE Model

  • Yasuo Hirose
  • Atsushi Inoue

This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound constraint on the nominal interest rate. Our experiments show that most of the parameter estimates in a standard sticky-price DSGE model are not biased although some biases are detected in the estimates of the monetary policy parameters and the steady-state real interest rate. Nevertheless, in our baseline experiment, these biases are so small that the estimated impulse response functions are quite similar to the true impulse response functions. However, as the probability of hitting the zero lower bound increases, the biases in the parameter estimates become larger and can therefore lead to substantial differences between the estimated and true impulse responses.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2013-09/60_2013_hirose_inoue.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-60.

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Length: 35 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-60
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  1. William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "Global Dynamics at the Zero Lower Bound," Auburn Economics Working Paper Series auwp2013-17, Department of Economics, Auburn University.
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  16. S. Borağan Aruoba & Pablo Cuba-Borda & Frank Schorfheide, 2012. "Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries," PIER Working Paper Archive 14-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 19 Jun 2014.
  17. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
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