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American Economic Review Vol. 107 No. 7 2017

The Empirical Implications of the Interest-Rate Lower Bound

Christopher Gust1; Edward Herbst1; David López-Salido1; Matthew Smith2

1 Division of Monetary Affairs, Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551 (email: ) · 2 Hutchin Hill Capital, LP, 142 West 57th Street, 15th Floor, New York, NY 10019 (email: )

Abstract

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.

DOI
10.1257/aer.20121437
Volume
107
Issue
7
Pages
1971-2006
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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