An Estimated DSGE Model with a Deflation Steady State

Yasuo Hirose

No 2018-014, Keio-IES Discussion Paper Series from Institute for Economics Studies, Keio University

Abstract: Benhabib et al. (2001) argue that there exists 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, positive shocks to households' preferences and wage markup, and a negative shock to monetary policy 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 sunspot shocks have a limited effect on Japan's output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.

Keywords: Deflation; Zero interest rate; Equilibrium indeterminacy; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2018-09-10
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 (3)

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Related works:
Journal Article: AN ESTIMATED DSGE MODEL WITH A DEFLATION STEADY STATE (2020)
Working Paper: An Estimated DSGE Model with a Deflation Steady State (2014)
Working Paper: An Estimated DSGE Model with a Deflation Steady State (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:keo:dpaper:2018-014

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