Working Paper: CEPR ID: DP8972
Authors: Jess Fernández-Villaverde; Grey Gordon; Pablo A. Guerrón-Quintana; Juan Francisco Rubio-Ramírez
Abstract: Motivated by the recent experience of the U.S. and the Eurozone, we describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, we find that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, we document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probabilty distributions of the duration of a spell at the ZLB; 3) the responses of output to government expenditure shocks at the ZLB, 4) the distribution of shocks that send the economy to the ZLB; and 5) the distribution of shocks that keep the economy at the ZLB.
Keywords: New Keynesian models; nonlinear solution methods; zero lower bound
JEL Codes: E30; E50; E60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive shocks to the discount factor or productivity (O49) | probability of hitting the ZLB (E31) |
| shocks to monetary or fiscal policy (E63) | probability of hitting the ZLB (E31) |
| ZLB (E62) | output (C67) |
| ZLB (E62) | consumption (E21) |
| ZLB (E62) | inflation (E31) |
| discount factor shock (G19) | ZLB (E62) |
| ZLB due to discount factor shock (E43) | multiplier effect of government expenditure (E62) |