Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

74 Pages Posted: 7 Oct 2014

See all articles by S. Borağan Aruoba

S. Borağan Aruoba

University of Maryland - Department of Economics

Pablo Borda

University of Maryland - Department of Economics

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 19, 2014

Abstract

We propose and solve a small-scale New-Keynesian model with Markov sunspot shocks that move the economy between a targeted-inflation regime and a deflation regime and fit it to data from the U.S. and Japan. For the U.S. we find that adverse demand shocks have moved the economy to the zero lower bound (ZLB) in 2009 and an expansive monetary policy has kept it there subsequently. In contrast, Japan has experienced a switch to the deflation regime in 1999 and remained there since then, except for a short period. The two scenarios have drastically different implications for macroeconomic policies. Fiscal multipliers are about 20% smaller in the deflationary regime, despite the economy remaining at the ZLB. While a commitment by the central bank to keep rates near the ZLB doubles the fiscal multipliers in the targeted-inflation regime (U.S.), it has no effect in the deflation regime (Japan).

Keywords: DSGE Models, Government Spending Multiplier, Japan, Multiple Equilibria

JEL Classification: C5, E4, E5

Suggested Citation

Aruoba, S. Boragan and Borda, Pablo and Schorfheide, Frank, Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (June 19, 2014). PIER Working Paper No. 14-035, Available at SSRN: https://ssrn.com/abstract=2506165 or http://dx.doi.org/10.2139/ssrn.2506165

S. Boragan Aruoba (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3508 (Phone)
301-405-3542 (Fax)

Pablo Borda

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Frank Schorfheide

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

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