On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint

Davide Debortoli, Jordi Galí and Luca Gambetti

NBER Macroeconomics Annual, 2020, vol. 34, issue 1, 141 - 170

Abstract: We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the US economy (the 2009Q1–2015Q4 period). We focus on two dimensions of economic performance that were ex ante likely to have been affected by a binding ZLB: (i) the volatility of macro variables and (ii) the economy’s response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation, and the long-term interest rate were hardly affected by the binding ZLB constraint. We show how a shadow interest rate rule (which we take as a proxy for forward guidance) can reconcile our empirical findings with the predictions of a simple New Keynesian model with a ZLB constraint.

Date: 2020
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Related works:
Chapter: On the Empirical (Ir)relevance of the Zero Lower Bound Constraint (2019)
Working Paper: On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (2019)
Working Paper: On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (2018)
Working Paper: On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (2018)
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