DP12691 On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint

Author(s): Davide Debortoli, Jordi Galí, Luca Gambetti
Publication Date: February 2018
Keyword(s): liquidity trap, regime changes, time-varying structural vector-autoregressive models, unconventional monetary policies
JEL(s): E44, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12691

We estimate a time-varying structural VAR that describes the dynamic responses of a number of U.S. macro variables to different identified shocks. We find no significant changes in the estimated responses over the period when the federal funds rate attained the zero lower bound (ZLB). This result is consistent with the hypothesis of "perfect substitutability" between conventional and unconventional monetary policies. Montecarlo simulations based on artificial time series generated from a standard New Keynesian model point to the validity of our empirical approach to detect the changes in equilibrium dynamics associated with ZLB episodes.