Federal Reserve Bank of Dallas
The Zero Lower Bound and Estimation Accuracy
During the Great Recession, many central banks lowered their policy rate to its zero lower bound (ZLB), creating a kink in the policy rule and calling into question linear estimation methods. There are two promising alternatives: estimate a fully nonlinear model that accounts for precautionary savings effects of the ZLB or a piecewise linear model that is much faster but ignores the precautionary savings effects. Repeated estimation with artificial datasets reveals some advantages of the nonlinear model, but they are not large enough to justify the longer estimation time, regardless of the ZLB duration in the data. Misspecification of the estimated models has a much larger impact on accuracy. It biases the parameter estimates and creates significant differences between the predictions of the models and the data generating process.
Cite this item
Tyler Atkinson & Alexander W. Richter & Nathaniel Throckmorton, The Zero Lower Bound and Estimation Accuracy, Federal Reserve Bank of Dallas, Working Papers 1804, 07 May 2018, revised 01 Feb 2019.
Note: A previous version of this paper circulated with the title, "The Accuracy of Linear and Nonlinear Estimation in the Presence of the Zero Lower Bound."
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
Keywords: Bayesian Estimation; Projection Methods; Particle Filter; OccBin; Inversion Filter
This item with handle RePEc:fip:feddwp:1804
is also listed on EconPapers
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