Understanding Persistent ZLB: Theory and Assessment

Cuba-Borda, Pablo; Singh, Sanjay R.

doi:10.2139/ssrn.3579765

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Understanding Persistent ZLB: Theory and Assessment

52 Pages Posted: 12 May 2020

See all articles by Pablo Cuba-Borda

Pablo Cuba-Borda

Board of Governors of the Federal Reserve System

Sanjay R. Singh

Federal Reserve Banks - Federal Reserve Bank of San Francisco; University of California, Davis

Date Written: April 9, 2020

Abstract

Concerns of prolonged near zero interest rates and below target inflation have become widespread in the advanced world. We build an analytical framework that incorporates two hypotheses of persistent ZLB episodes: expectations-driven liquidity traps and secular stagnation driven liquidity traps. We estimate the DSGE model with Japanese data from 1998:Q1 to 2012:Q4. Using Bayesian prediction pools, we find that a policymaker faces considerable real-time uncertainty in identifying the dominant narrative. We propose robust policies that eliminate expectations-driven traps and are expansionary under secular stagnation.

Keywords: Expectations-driven trap, secular stagnation, zero lower bound, robust policies

JEL Classification: E31, E32, E52

Suggested Citation: Suggested Citation

Cuba-Borda, Pablo and Singh, Sanjay R., Understanding Persistent ZLB: Theory and Assessment (April 9, 2020). Available at SSRN: https://ssrn.com/abstract=3579765 or http://dx.doi.org/10.2139/ssrn.3579765