The Empirical Implications of the Interest-Rate Lower Bound
76 Pages Posted: 8 Jan 2013
Date Written: January 2017
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: Suggested Citation