The Zero Lower Bound: Implications for Modelling the Interest Rate

Joshua Chan and Rodney Strachan ()
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Rodney Strachan: School of Economics, and Centre for Applied Macroeconomic Analysis, University of Queensland; The Rimini Centre for Economic Analysis, Italy

Working Paper series from Rimini Centre for Economic Analysis

Abstract: The time-varying parameter vector autoregressive (TVP-VAR) model has been used to successfully model interest rates and other variables. As many short interest rates are now near their zero lower bound (ZLB), a feature not included in the standard TVP-VAR specification, this model is no longer appropriate. However, there remain good reasons to include short interest rates in macro models, such as to study the effect of a credit shock. We propose a TVP-VAR that accounts for the ZLB and study algorithms for computing this model that are less computationally burdensome than others yet handle many states well. To illustrate the proposed approach, we investigate the effect of the zero lower bound of interest rate on transmission of a monetary shock.

Date: 2014-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ecm, nep-for and nep-mon
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Citations: View citations in EconPapers (12)

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