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The empirical implications of the interest-rate lower bound

  • Gust, Christopher J.
  • Lopez-Salido, J. David

    (Board of Governors of the Federal Reserve System (U.S.))

  • Smith, Matthew E.

    ()

    (Hutchin Hill Capital)

  • Herbst, Edward

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 25 percent of the sharp contraction in U.S. GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-83.

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Length: 49 pages
Date of creation: 2012
Date of revision: 12 Feb 2016
Handle: RePEc:fip:fedgfe:2012-83
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  17. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  18. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
  19. Braun, R Anton & Koerber, Lena & Waki, Yuichiro, 2015. "Some Unpleasant Properties of Loglinearized Solutions When the Nominal Rate is Zero," Bank of England working papers 553, Bank of England.
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