Working Paper: NBER ID: w18058
Authors: Jess Fernández-Villaverde; Grey Gordon; Pablo A. Guerrón-Quintana; Juan 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: zero lower bound; New Keynesian model; government expenditure shocks; fiscal policy; monetary policy
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 |
|---|---|
| Zero Lower Bound (ZLB) (E43) | economy dynamics (E32) |
| Zero Lower Bound (ZLB) (E43) | output below steady-state values (D57) |
| Zero Lower Bound (ZLB) (E43) | consumption below steady-state values (E21) |
| Zero Lower Bound (ZLB) (E43) | inflation below steady-state values (E31) |
| Positive shocks to discount factor (D15) | probability of hitting ZLB (E31) |
| Positive shocks to productivity (O49) | probability of hitting ZLB (E31) |
| Shocks to monetary policy (E49) | probability of hitting ZLB (E31) |
| Shocks to fiscal policy (E62) | probability of hitting ZLB (E31) |
| Discount factor shock (G19) | government expenditure multiplier (E62) |