The Empirical Implications of the Interest-Rate Lower Bound

59 Pages Posted: 1 Feb 2013

See all articles by Christopher J. Gust

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

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: November 2012

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

Keywords: Bayesian estimation, DSGE model, zero lower bound

JEL Classification: C11, C32, E32, E52

Suggested Citation

Gust, Christopher J. and Lopez-Salido, David and Smith, Matthew E., The Empirical Implications of the Interest-Rate Lower Bound (November 2012). CEPR Discussion Paper No. DP9214. Available at SSRN: https://ssrn.com/abstract=2210183

Christopher J. Gust (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
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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