Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

S. Boragan Aruoba, Pablo Cuba-Borda and Frank Schorfheide

The Review of Economic Studies, 2018, vol. 85, issue 1, 87-118

Abstract: We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium, a sunspot shock can move the economy from a regime in which inflation is close to the central bank’s target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A non-linear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.

Keywords: Deflation; DSGE Models; 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)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (116)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdx027 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
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 (2014)
Working Paper: Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:1:p:87-118.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().