The Empirical Implications of the Interest-Rate Lower Bound

76 Pages Posted: 8 Jan 2013

See all articles by Christopher J. Gust

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

Edward Herbst

Board of Governors of the Federal Reserve System

David Lopez-Salido

Board of Governors of the Federal Reserve System

Matthew E. Smith

Hutchin Hill Capital

Multiple version iconThere are 2 versions of this paper

Date Written: January 2017

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. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 25 percent of the sharp contraction in U.S. GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed.

Keywords: Zero lower bound, DSGE model, Bayesian estimation

JEL Classification: C11, C32, E32, E52

Suggested Citation

Gust, Christopher J. and Herbst, Edward and Lopez-Salido, David and Smith, Matthew E., The Empirical Implications of the Interest-Rate Lower Bound (January 2017). FEDS Working Paper No. 2012-83. Available at SSRN: https://ssrn.com/abstract=2197515 or http://dx.doi.org/10.2139/ssrn.2197515

Christopher J. Gust (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Edward Herbst

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Matthew E. Smith

Hutchin Hill Capital ( email )

142 West 57th Street
New York, NY 10019
United States

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