Nonlinear estimation of a New Keynesian model with endogenous inflation de-anchoring

Dominik Hecker and Maik H. Wolters

No 222, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Abstract: We estimate a New Keynesian model that allows endogenous transitions between a target equilibrium, with inflation fluctuating around the central bank's target and interest rates typically positive, and a low-inflation equilibrium, where the effective lower bound binds and de-anchored expectations keep inflation persistently below target. The model is estimated using Bayesian methods, employing an ensemble MCMC sampler with a particle filter to handle nonlinearities. We find that the United States remained in the target equilibrium after the global financial crisis, the euro area transitioned to the low-inflation equilibrium in 2015, with the subsequent inflation surge initiating a return to the target equilibrium in 2021, and Japan entered the lowinflation equilibrium in the early 2000s. Bayes factors strongly favor the equilibrium-transition model over an alternative specification in which the lower bound binds only occasionally and expectations remain anchored.

Keywords: Multiple Equilibria; Nonlinear Estimation; Particle Filter; Deflation; Zero Lower Bound; Natural Interest Rate; Inflation Expectations (search for similar items in EconPapers)
JEL-codes: C51 E31 E43 E52 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-inv and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:imfswp:333406

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