The Empirical Implications of the Interest-Rate Lower Bound

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the US economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resul...

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Bibliographic Details
Published inThe American economic review Vol. 107; no. 7; pp. 1971 - 2006
Main Authors Gust, Christopher, Herbst, Edward, López-Salido, David, Smith, Matthew E.
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.07.2017
Subjects
Bayesian analysis
Capital investments
Economic models
Economic recovery
Great Recession
Gusts
Inflation rates
Inflation shocks
Interest rates
Macroeconomic modeling
Monetary policy
Nominal interest rates
Recovery
Risk premiums
United States > US
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ISSN0002-8282
1944-7981
DOI10.1257/aer.20121437

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Summary:Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the US economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in US GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed.
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.20121437