The Zero Lower Bound and Estimation Accuracy

36 Pages Posted: 13 Jun 2018 Last revised: 26 Feb 2019

See all articles by Tyler Atkinson

Tyler Atkinson

Federal Reserve Banks - Federal Reserve Bank of Dallas

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

College of William and Mary

Date Written: 2018-05-07

Abstract

During the Great Recession, many central banks lowered their policy rate to its zero lower bound (ZLB), creating a kink in the policy rule and calling into question linear estimation methods. There are two promising alternatives: estimate a fully nonlinear model that accounts for precautionary savings effects of the ZLB or a piecewise linear model that is much faster but ignores the precautionary savings effects. Repeated estimation with artificial datasets reveals some advantages of the nonlinear model, but they are not large enough to justify the longer estimation time, regardless of the ZLB duration in the data. Misspecification of the estimated models has a much larger impact on accuracy. It biases the parameter estimates and creates significant differences between the predictions of the models and the data generating process.

Keywords: Bayesian Estimation, Projection Methods, Particle Filter, OccBin, Inversion Filter

JEL Classification: C11, C32, C51, E43

Suggested Citation

Atkinson, Tyler and Richter, Alexander W. and Throckmorton, Nathaniel A., The Zero Lower Bound and Estimation Accuracy (2018-05-07). FRB of Dallas Working Paper No. 1804. Available at SSRN: https://ssrn.com/abstract=3195179 or http://dx.doi.org/10.24149/wp1804r1

Tyler Atkinson (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel A. Throckmorton

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23187
United States

HOME PAGE: http://nathrockmorton.people.wm.edu/

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