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Zero Lower Bound and Parameter Bias in an Estimated DSGE Model

  • Yasuo Hirose

    (Faculty of Economics, Keio University)

  • Atsushi Inoue

    (Department of Economics, 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. Classification-JEL : C32, E30, E52

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Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 012.

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Length: 34 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:upd:utppwp:012
Contact details of provider: Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
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Web page: http://www.e.u-tokyo.ac.jp/
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  1. Lars E.O. Svensson & Stefan Laseen, 2009. "Anticipated Alternative Instrument-Rate Paths in Policy Simulations," 2009 Meeting Papers 788, Society for Economic Dynamics.
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  16. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
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