Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

50 Pages Posted: 5 May 2016

See all articles by Frank Schorfheide

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)

Pablo Cuba-Borda

Board of Governors of the Federal Reserve System

S. Borağan Aruoba

University of Maryland - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-05

Abstract

We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.

Keywords: Deflation, DSGE Models, Japan, Multiple Equilibria, Nonlinear Filtering, Nonlinear Solution Methods, Sunspots, U.S., ZLB

JEL Classification: C5, E4, E5

Suggested Citation

Schorfheide, Frank and Cuba-Borda, Pablo and Aruoba, S. Boragan, Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (2016-05). FRB International Finance Discussion Paper No. 1163, Available at SSRN: https://ssrn.com/abstract=2774644 or http://dx.doi.org/10.17016/IFDP.2016.1163

Frank Schorfheide (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
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HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

Pablo Cuba-Borda

Board of Governors of the Federal Reserve System ( email )

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

S. Boragan Aruoba

University of Maryland - Department of Economics ( email )

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

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