Working Paper: CEPR ID: DP9214
Authors: Christopher Gust; J. David López-Salido; Matthew E. Smith
Abstract: Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. Compared with the hypothetical situation in which monetary policy can act in an unconstrained fashion, our estimates imply that U.S. output was more than 1 percent lower, on average, over the 2009{2011 period. Moreover, around 20 percent of the drop in U.S. GDP during the recession of 2008-2009 was due to the interest-rate lower bound. We show that the estimated model is capable of generating lower bound episodes that resemble salient characteristics of the observed U.S. episode, including its expected duration.
Keywords: Bayesian estimation; DSGE model; Zero lower bound
JEL Codes: C11; C32; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate lower bound (E43) | output (C67) |
| interest rate lower bound (E43) | inflation (E31) |
| discount rate shock (E43) | interest rate lower bound (E43) |
| private demand fall (D12) | interest rate lower bound (E43) |
| binding lower bound (C69) | recessionary conditions (E66) |
| lower bound constraints monetary policy (E52) | limited ability to stimulate the economy (E62) |
| lower bound (D20) | GDP drop (E20) |