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Nonlinear adventures at the zero lower bound

Author

Listed:
  • Jesús Fernández-Villaverde
  • Grey Gordon
  • Pablo Guerron-Quintana
  • Juan F. Rubio-Ramirez

Abstract

Motivated by the recent experience of the U.S. and the Eurozone, the authors 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, the authors found that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, the authors 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.

Suggested Citation

  • Jesús Fernández-Villaverde & Grey Gordon & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez, 2012. "Nonlinear adventures at the zero lower bound," Working Papers 12-10, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:12-10
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    References listed on IDEAS

    as
    1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, September.
    2. Malin, Benjamin A. & Krueger, Dirk & Kubler, Felix, 2011. "Solving the multi-country real business cycle model using a Smolyak-collocation method," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 229-239, February.
    3. Kenneth L. Judd & Lilia Maliar & Serguei Maliar, 2011. "Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models," Quantitative Economics, Econometric Society, vol. 2(2), pages 173-210, July.
    4. Grey Gordon, 2011. "Computing Dynamic Heterogeneous-Agent Economies: Tracking the Distribution," PIER Working Paper Archive 11-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Keynesian economics; Nonlinear theories; Interest rates;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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