On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint

45 Pages Posted: 13 May 2019

See all articles by Davide Debortoli

Davide Debortoli

Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE)

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Luca Gambetti

University of Turin

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.

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Suggested Citation

Debortoli, Davide and Gali, Jordi and Gambetti, Luca, On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (May 2019). NBER Working Paper No. w25820, Available at SSRN: https://ssrn.com/abstract=3387175

Davide Debortoli (Contact Author)

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Jordi Gali

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2754 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~gali

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Cambridge, MA 02142
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Luca Gambetti

University of Turin ( email )

Via Po 53
Torino, Turin - Piedmont 10100
Italy

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