Macroeconomic Dynamics Near the ZLB : A Tale of Two Countries
Abstract: We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.
File(s): File format is application/pdf http://www.federalreserve.gov/econresdata/ifdp/2016/files/ifdp1163.pdf
Part of Series: International Finance Discussion Papers
Publication Date: 2016-05
Pages: 47 pages