Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

S. Boragan Aruoba, Pablo Cuba-Borda and Frank Schorfheide ()
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Frank Schorfheide: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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; Nonlinear Filtering; Nonlinear Solution Methods; Sunspots; U.S.; ZLB (search for similar items in EconPapers)
JEL-codes: C5 E4 E5 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2012-09-10, Revised 2014-06-19
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Related works:
Journal Article: Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (2018)
Working Paper: Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (2016)
Working Paper: Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (2013)
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