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Estimating DSGE models with forward guidance

Author

Listed:
  • Mariano Kulish

    () (School of Economics, Australian School of Business, the University of New South Wales)

  • James Morley

    () (School of Economics, Australian School of Business, the University of New South Wales)

  • Tim Robinson

    () (Melbourne Institute of Applied Economics and Social Research, University of Melbourne)

Abstract

Motivated by the use of forward guidance, we propose a method to estimate DSGE models in which the central bank holds the policy rate fixed for an extended period. Private agents’ beliefs about how long the fixed-rate regime will last influences, among other observable variables, current output, inflation and interest rates of longer maturities. We estimate the shadow policy rate and construct counterfactual scenarios to quantify the severity of the zero lower bound constraint. Using the Smets and Wouters (2007) model, we find that the expected duration of the zero interest rate policy has been around 2 years, that the shadow rate has been around -3 per cent and that the zero lower bound has imposed a significant output loss.

Suggested Citation

  • Mariano Kulish & James Morley & Tim Robinson, 2014. "Estimating DSGE models with forward guidance," Discussion Papers 2014-32A, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2014-32a
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2014-32A.pdf
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    References listed on IDEAS

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    8. Jeffrey R. Campbell & Charles L. Evans & Jonas D.M. Fisher & Alejandro Justiniano, 2012. "Macroeconomic Effects of Federal Reserve Forward Guidance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 1-80.
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    14. Mariano Kulish & James Morley & Tim Robinson, 2014. "Estimating the Expected Duration of the Zero Lower Bound in DSGE Models with Forward Guidance," Melbourne Institute Working Paper Series wp2014n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
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    Cited by:

    1. Masolo, Riccardo M. & Winant, Pablo E., 2019. "The Stochastic Lower Bound," Economics Letters, Elsevier, vol. 180(C), pages 54-57.
    2. Andrew Binning & Junior Maih, 2016. "Implementing the Zero Lower Bound in an Estimated Regime-Switching DSGE Model," Working Papers No 3/2016, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    3. Dmitry Kreptsev & Sergei Seleznev, 2018. "Forecasting for the Russian Economy Using Small-Scale DSGE Models," Russian Journal of Money and Finance, Bank of Russia, vol. 77(2), pages 51-67, June.
    4. Andrew Binning & Junior Maih, 2016. "Forecast uncertainty in the neighborhood of the effective lower bound: How much asymmetry should we expect?," Working Paper 2016/13, Norges Bank.

    More about this item

    Keywords

    zero lower bound; forward guidance;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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