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Estimating a Nonlinear New Keynesian Model with a Zero Lower Bound for Japan

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  • Hirokuni Iiboshi
  • Mototsugu Shintani
  • Kozo Ueda

Abstract

We estimate a small-scale macroeconomic model for Japan by taking into account the nonlinearity stemming from the zero lower bound (ZLB) of the nominal interest rate. To this end, we apply the Sequential Monte Carlo Squared method to the case of Japan, where the ZLB has constrained the country's monetary policy for a considerably long period. Employing a nonlinear estimation is crucial to deriving implications for monetary policy. For example, the Bayesian model selection suggests that past experience of recessions reducing the nominal interest rate to zero is carried over to today's monetary policy. However, a nonlinear estimation has little effect on the estimate of the natural rate of interest, which has often been negative since the mid-1990s.

Suggested Citation

  • Hirokuni Iiboshi & Mototsugu Shintani & Kozo Ueda, 2018. "Estimating a Nonlinear New Keynesian Model with a Zero Lower Bound for Japan," Working Papers e120, Tokyo Center for Economic Research.
  • Handle: RePEc:tcr:wpaper:e120
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    References listed on IDEAS

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    1. Richter, Alexander & Throckmorton, Nathaniel, 2016. "Are nonlinear methods necessary at the zero lower bound?," Working Papers 1606, Federal Reserve Bank of Dallas.
    2. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    3. Yasuo Hirose & Atsushi Inoue, 2016. "The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(4), pages 630-651, June.
    4. Boneva, Lena Mareen & Braun, R. Anton & Waki, Yuichiro, 2016. "Some unpleasant properties of loglinearized solutions when the nominal rate is zero," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 216-232.
    5. Yasuo Hirose & Atsushi Inoue, 2016. "The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(4), pages 630-651, June.
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