Paper #1594

Title:

On the empirical (ir)relevance of the zero lower bound constraint

Authors:

Davide Debortoli, Jordi Galí and Luca Gambetti

Date:

January 2018 (Revised: June 2019)

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.

Keywords:

Regime changes, liquidity trap, unconventional monetary policies, time-varying structural vector-autoregressive models.

JEL codes:

E44, E52

Area of Research:

Macroeconomics and International Economics

Published in:

NBER Macroeconomics Annual, volume 34, 2019

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