On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint

Abstract

We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of economic performance that were ex-ante likely to have been affected by a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint. We show how a shadow interest rate rule (which we take as a proxy for forward guidance) can reconcile our empirical findings with the predictions of a simple New Keynesian model with a ZLB constraint.

Measuring Exchange Rate, Price, and Output Dynamics at the Effective Lower Bound

“…As one possibility for their finding, and in line with our results, they mention that the basic New Keynesian model does not take into account non-conventional policy measures that ameliorate the ELB constraint. Debortoli, Galí and Gambetti (2018) find that, for the US, the impulse responses of a time-varying parameter VAR do not change at the ELB. They also suggest that this is because conventional monetary policy can be substituted with non-conventional measures.…”

“…Swanson and Williams (2014a), for example, find that longterm yields respond to macroeconomic news even though short-term interest rates do not. Moreover, Debortoli et al (2018) find for the US that non-conventional monetary policy sufficed to offset the worst impact of the ELB.…”

“…4 Second, against the backdrop of our particularly short samples, the Bayesian shrinkage approach allows a relatively rich model in terms of the lag length and number of variables while still letting the data speak about possible parameter changes (in contrast to more restrictive Minnesota-type priors). Finally, our approach is closely related to a time-varying parameter VAR (TVP-VAR) as used by Primiceri (2005), Baumeister and Benati (2013), and Debortoli, Galí and Gambetti (2018). In typical TVP-VARs, however, coefficients change every period, which increases the degrees of freedom substantially.…”

Gains from Wage Flexibility and the Zero Lower Bound*

“…See, for example, Swanson and Williams (2014), Aruoba, Cuba‐Borda and Schorfheide (2018), Liu et al . (2019) and Debortoli, Galí and Gambetti (2020).…”

The Optimal Inflation Target and the Natural Rate of Interest

“…Beyond these monetary policy measures, fiscal policies could play a significant role, as emphasized by Correia et al (2013). As a result, the ZLB might be less stringent a constraint in a practical policy context than in our analysis, as argued in Debortoli et al (2019) among others. However, the efficacy and the costs of these policies should also be part of the analysis.…”