Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

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

No 19248, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose and solve a small-scale New-Keynesian model with Markov sunspot shocks that move the economy between a targeted-inflation regime and a deflation regime and fit it to data from the U.S. and Japan. For the U.S. we find that adverse demand shocks have moved the economy to the zero lower bound (ZLB) in 2009 and an expansive monetary policy has kept it there subsequently. In contrast, Japan has experienced a switch to the deflation regime in 1999 and remained there since then, except for a short period. The two scenarios have drastically different implications for macroeconomic policies. Fiscal multipliers are about 20% smaller in the deflationary regime, despite the economy remaining at the ZLB. While a commitment by the central bank to keep rates near the ZLB doubles the fiscal multipliers in the targeted-inflation regime (U.S.), it has no effect in the deflation regime (Japan).

JEL-codes: C5 E4 E5 (search for similar items in EconPapers)
Date: 2013-07
Note: EFG ME
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Citations: View citations in EconPapers (70)

Published as S Borağan Aruoba Pablo Cuba-Borda Frank Schorfheide The Review of Economic Studies, Volume 85, Issue 1, 1 January 2018, Pages 87–118, https://doi.org/10.1093/restud/rdx027

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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 (2016)
Working Paper: Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries (2014)
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