Endogenous forecast switching near the zero lower bound

Kevin Lansing

Journal of Monetary Economics, 2021, vol. 117, issue C, 153-169

Abstract: A representative agent contemplates the possibility of an occasionally binding zero lower bound (ZLB) on the nominal interest rate that is driven by switching between two local equilibria, labeled the “targeted” and “deflation” solutions, respectively. This view turns out to be true in simulations, thus validating the agent’s beliefs. I solve for the time series of stochastic shocks and endogenous forecast weights that allow the model to exactly replicate the observed time paths of U.S. data since 1988. The data since the start of the ZLB episode in 2008.Q4 are best described as a time-varying mixture of the two local equilibria.

Keywords: Natural rate of interest; Liquidity trap; Zero lower bound; Taylor rule; Deflation (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Working Paper: Endogenous Forecast Switching Near the Zero Lower Bound (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:153-169

DOI: 10.1016/j.jmoneco.2019.12.003

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