Nonlinear Adventures at the Zero Lower Bound

46 Pages Posted: 12 May 2012 Last revised: 5 May 2024

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Grey Gordon

Federal Reserve Banks - Federal Reserve Bank of Richmond

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Date Written: May 2012

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.

Suggested Citation

Fernández-Villaverde, Jesús and Gordon, Grey and Guerron-Quintana, Pablo and Rubio-Ramirez, Juan Francisco, Nonlinear Adventures at the Zero Lower Bound (May 2012). NBER Working Paper No. w18058, Available at SSRN: https://ssrn.com/abstract=2056687

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Grey Gordon

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

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Pablo Guerron-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

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Juan Francisco Rubio-Ramirez

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