The zero lower bound and parameter bias in an estimated DSGE model

Yasuo Hirose and Atsushi Inoue

No 14-00009, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound (ZLB) constraint on the nominal interest rate. Our Monte Carlo experiments using a standard sticky-price DSGE model show that no significant bias is detected in parameter estimates and that the estimated impulse response functions are quite similar to the true ones. However, as the probability of hitting the ZLB increases, the parameter bias becomes larger and therefore leads to substantial differences between the estimated and true impulse responses. It is also demonstrated that the model missing the ZLB causes biased estimates of structural shocks even with the virtually unbiased parameters.

JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2014-09-09
New Economics Papers: this item is included in nep-dge, nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model (2016)
Working Paper: The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model (2014)
Working Paper: Zero Lower Bound and Parameter Bias in an Estimated DSGE Model (2013)
Working Paper: Zero Lower Bound and Parameter Bias in an Estimated DSGE Model (2013)
Working Paper: Zero Lower Bound and Parameter Bias in an Estimated DSGE Model (2013)
Working Paper: Zero Lower Bound and Parameter Bias in an Estimated DSGE Model (2013)
Working Paper: Zero Lower Bound and Parameter Bias in an Estimated DSGE Model (2013)
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