DP8972 Nonlinear Adventures at the Zero Lower Bound

Author(s): Jesús Fernández-Villaverde, Grey Gordon, Pablo A. Guerron-Quintana, Juan Francisco Rubio-Ramírez
Publication Date: May 2012
Keyword(s): New Keynesian models, Nonlinear solution methods., Zero lower bound
JEL(s): E30, E50, E60
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8972

Motivated by the recent experience of the U.S. and the Eurozone, we describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, we find that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, we document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probabilty distributions of the duration of a spell at the ZLB; 3) the responses of output to government expenditure shocks at the ZLB, 4) the distribution of shocks that send the economy to the ZLB; and 5) the distribution of shocks that keep the economy at the ZLB.