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Zero Lower Bound and Parameter Bias in an Estimated DSGE Model

  • Yasuo Hirose

    ()

    (Keio University)

  • Atsushi Inoue

    ()

    (Southern Methodist University)

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: ftp://ftp1.economics.smu.edu/WorkingPapers/2013/INOUE/INOUE-2013-06.pdf
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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 1306.

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Date of creation: Sep 2013
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Handle: RePEc:smu:ecowpa:1306
Contact details of provider: Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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  15. 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.
  16. Richard Dennis, 2008. "Consumption-habits in a new Keynesian business cycle model," Working Paper Series 2008-35, Federal Reserve Bank of San Francisco.
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