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An Estimated DSGE Model with a Deflation Steady State

Yasuo Hirose

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Benhabib, Schmitt-Grohé, and Uribe (2001) argue for the existence of a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, shocks to households’ preferences, investment adjustment costs, and external demand do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that the effect of sunspot shocks on Japan’s business cycles is marginal and that macroeconomic stability during the period was a result of good luck.

Keywords: Deflation; Zero interest rate; Japanese economy; Indeterminacy; Bayesian Estimation (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2014-07
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Related works:
Working Paper: An Estimated DSGE Model with a Deflation Steady State (2018) Downloads
Working Paper: An Estimated DSGE Model with a Deflation Steady State (2014) Downloads
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