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

Davide Debortoli (), Jordi Galí and Luca Gambetti

No 1013, Working Papers from Barcelona Graduate School of Economics

Abstract: We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). 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.

Keywords: regime changes; liquidity trap; unconventional monetary policies; time-varying structural vector-autoregressive models (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-01
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Related works:
Chapter: On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (2019) Downloads
Working Paper: On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (2019) Downloads
Working Paper: On the empirical (ir)relevance of the zero lower bound constraint (2019) Downloads
Working Paper: On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (2018) Downloads
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