Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

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

No 1163, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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 nonlinear 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.; zero lower bound (ZLB) (search for similar items in EconPapers)
JEL-codes: C5 E4 E5 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2016-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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Related works:
Journal Article: Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (2018)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1163

DOI: 10.17016/IFDP.2016.1163

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