The Natural Rate of Interest in a Nonlinear DSGE Model

Abstract

This paper investigates how and to what extent nonlinearities, including the zero lower bound on the nominal interest rate, affect the estimate of the natural rate of interest in a dynamic stochastic general equilibrium model with sticky prices and wages. The estimated natural rate of interest in a nonlinear model is substantially different from that in its linear counterpart because of a contractionary effect of the zero lower bound. Price and wage dispersion, from which a linear model abstracts, play a minor role in identifying the natural rate.

Estimating a Nonlinear New Keynesian Model with the Zero Lower Bound for Japan

“…For types (2) and 3, the figure suggests that the parameter difference has a similar size, but opposite effect on the natural rate of interest as that of the shock difference. Type (2) increases the natural rate of interest, as in Hirose and Sunakawa (2017). This stems from the fact that the estimate of the steady-state natural rate of interest r * in Model 1 is higher than that in Model without the ZLB as shown in Table 2.…”

“…Studies on developments in the natural rate of interest include the works of Krugman (1998), Williams (2003, 2016), Neiss and Nelson (2003) With the exception of the recent work of Hirose and Sunakawa (2017), none of these studies use the DSGE model while explicitly considering the ZLB. Hirose and Sunakawa (2017) evaluate the natural rate of interest using the DSGE model with the ZLB for the United States, but do not estimate the model with the ZLB.…”

Review of Solution and Estimation Methods for Nonlinear Dynamic Stochastic General Equilibrium Models with the Zero Lower Bound

“…Hirose and Sunakawa () estimate the natural interest rate in the USA using a nonlinear New Keynesian DSGE model with the ZLB and examine how nonlinearities affect the estimates of the natural rate and its driving forces . To parameterise the model, they estimate a linearised version of the model using US data prior to the date when the nominal interest rate was bounded at zero (1983Q1–2007Q4).…”

A Promised Value Approach to Optimal Monetary Policy

“…We use the following indicator function approach as in Gust, Herbst, López-Salido, and Smith (2017), Nakata (2017), and Hirose and Sunakawa (2017). That is, for ς ∈ {y, π, φ 1 , φ 2 },…”