The Empirical Implications of the Interest-Rate Lower Bound

Christopher J. Gust · J. David López‐Salido · Matthew Smith

26 citations0/0 files storedFinance and Economics Discussion Series

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic theories and models

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 generates lower bound episodes that resemble salient characteristics of the observed U.S. episode, including its expected duration.

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References

2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 1982Sticky Prices in the United States 2011When Is the Government Spending Multiplier Large?2003Zero Bound on Interest Rates and Optimal Monetary Policy 1999Chapter 2 Monetary policy shocks: What have we learned and to what end?2007Bayesian Analysis of DSGE Models 2007Estimating Macroeconomic Models: A Likelihood Approach

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