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The Zero Lower Bound: Implications for Modelling the Interest Rate

Listed author(s):
  • Joshua C.C. Chan

    ()

    (Research School of Economics, and Centre for Applied Macroeconomic Analysis, Australian National University)

  • Rodney Strachan

    ()

    (School of Economics, and Centre for Applied Macroeconomic Analysis, University of Queensland; The Rimini Centre for Economic Analysis, Italy)

The time-varying parameter vector autoregressive (TVP-VAR) model has been used to successfully model interest rates and other variables. As many short interest rates are now near their zero lower bound (ZLB), a feature not included in the standard TVP-VAR specification, this model is no longer appropriate. However, there remain good reasons to include short interest rates in macro models, such as to study the effect of a credit shock. We propose a TVP-VAR that accounts for the ZLB and study algorithms for computing this model that are less computationally burdensome than others yet handle many states well. To illustrate the proposed approach, we investigate the effect of the zero lower bound of interest rate on transmission of a monetary shock.

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File URL: http://www.rcfea.org/RePEc/pdf/wp42_14.pdf
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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 42_14.

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Date of creation: Dec 2014
Handle: RePEc:rim:rimwps:42_14
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  1. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-1339, November.
  2. Flury, Thomas & Shephard, Neil, 2011. "Bayesian Inference Based Only On Simulated Likelihood: Particle Filter Analysis Of Dynamic Economic Models," Econometric Theory, Cambridge University Press, vol. 27(05), pages 933-956, October.
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