Working Paper: NBER ID: w25820
Authors: Davide Debortoli; Jordi Gal; Luca Gambetti
Abstract: The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.
Keywords: Zero Lower Bound; Unconventional Monetary Policies; Macroeconomic Volatility; Economic Performance
JEL Codes: E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| zlb constraint (D10) | volatility of macro variables (E39) |
| zlb constraint (D10) | response of output to shocks (E32) |
| zlb constraint (D10) | response of inflation to shocks (E31) |
| zlb constraint (D10) | response of long-term interest rates to shocks (E43) |
| shocks (E32) | depth of the recession (F44) |