IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Are nonlinear methods necessary at the zero lower bound?

Listed author(s):
  • Richter, Alexander

    ()

    (Federal Reserve Bank of Dallas)

  • Throckmorton, Nathaniel

    (College of William & Mary)

This paper examines the importance of the zero lower bound (ZLB) constraint on the nominal interest rate by estimating three variants of a small-scale New Keynesian model: (1) a nonlinear model with an occassionally binding ZLB constraint; (2) a constrained linear model, which imposes the constraint in the filter but not the solution; and (3) an unconstrained linear model, which never imposes the constraint. The posterior distributions are similar, but important differences arise in their predictions at the ZLB. The nonlinear model fits the data better at the ZLB and primarily attributes the ZLB to a reduction in household demand due to discount factor shocks. In the linear models, the ZLB is due to large contractionary monetary policy shocks, which is at odds with the Fed’s expansionary policy during the Great Recession. Posterior predictive analysis shows the nonlinear model is partially able to account for the increase in output volatility and the negative skewness in output and inflation that occurred during the ZLB period, whereas the linear models predict almost no changes in those statistics. We also compare the results from our nonlinear model to the quasi-linear solution based on OccBin. The quasi-linear model fits the data better than the linear models, but it still generate too little volatility at the ZLB and predicts that a large policy shock caused the ZLB to bind in 2008Q4.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.dallasfed.org/assets/documents/research/papers/2016/wp1606.pdf
File Function: Full text
Download Restriction: no

Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1606.

as
in new window

Length: 18 pages
Date of creation: 02 Aug 2016
Handle: RePEc:fip:feddwp:1606
DOI: 10.24149/wp1606
Contact details of provider: Web page: http://www.dallasfed.org/
Email:


More information through EDIRC

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Faust, Jon & Gupta, Abhishek, 2010. "Posterior Predictive Analysis for Evaluating DSGE Models," MPRA Paper 26721, University Library of Munich, Germany.
  2. Suh, Hyunduk & Walker, Todd B., 2016. "Taking financial frictions to the data," Journal of Economic Dynamics and Control, Elsevier, vol. 64(C), pages 39-65.
  3. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander W. & Throckmorton, Nathaniel A., 2015. "The zero lower bound, the dual mandate, and unconventional dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 14-38.
  4. Guerrieri, Luca & Iacoviello, Matteo, 2015. "OccBin: A toolkit for solving dynamic models with occasionally binding constraints easily," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 22-38.
  5. Taisuke Nakata, 2013. "Uncertainty at the zero lower bound," Finance and Economics Discussion Series 2013-09, Board of Governors of the Federal Reserve System (U.S.).
  6. Gust, Christopher J. & Lopez-Salido, J. David & Smith, Matthew E. & Herbst, Edward, 2012. "The Empirical Implications of the Interest-Rate Lower Bound," Finance and Economics Discussion Series 2012-83, Board of Governors of the Federal Reserve System (U.S.), revised 12 Feb 2016.
  7. Edward P. Herbst & Frank Schorfheide, 2016. "Bayesian Estimation of DSGE Models," Economics Books, Princeton University Press, edition 1, number 10612, March.
  8. Coleman, Wilbur John, II, 1991. "Equilibrium in a Production Economy with an Income Tax," Econometrica, Econometric Society, vol. 59(4), pages 1091-1104, July.
  9. William B. Peterman, 2016. "Reconciling Micro And Macro Estimates Of The Frisch Labor Supply Elasticity," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 100-120, 01.
  10. John Geweke, 1999. "Using simulation methods for bayesian econometric models: inference, development,and communication," Econometric Reviews, Taylor & Francis Journals, vol. 18(1), pages 1-73.
  11. Plante, Michael D. & Richter, Alexander & Throckmorton, Nathaniel, 2014. "The zero lower bound and endogenous uncertainty," Working Papers 1405, Federal Reserve Bank of Dallas.
  12. Yasuo Hirose & Atsushi Inoue, 2016. "The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(4), pages 630-651, 06.
  13. Peter N. Ireland, 2011. "A New Keynesian Perspective on the Great Recession," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 31-54, 02.
  14. Yasuo Hirose & Atsushi Inoue, 2016. "The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(4), pages 630-651, 06.
  15. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  16. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  17. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:1606. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.