Estimating DSGE models with zero interest rate policy
M Kulish, J Morley, T Robinson
Journal of Monetary Economics | Elsevier BV | Published : 2017
We propose estimating DSGE models in which the central bank fixes the policy rate for an extended period of time and apply our approach to estimate expected durations of the Federal Reserve's zero interest rate policy since 2009. We find a large increase in expected duration in 2011 with the move to calendar-based guidance and a decrease in 2013 with the ‘Taper tantrum’. These changes are identified by the influence of expected duration on output, inflation and interest rates at longer maturities. The structural model measures the severity of the zero lower bound constraint and the effects of unconventional policy.
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We wish to thank the editors Ricardo Reis, Giorgio Primiceri and an anonymous referee for detailed comments that have helped us improve the paper. We would also like to thank our discussant at the 2013 RBNZ Conference, Andrea Tambalotti, for valuable suggestions at an earlier stage of the work. For useful discussions we thank Efrem Castelnuovo, Han Chen, Marco Del Negro, Marc Giannoni, Callum Jones, Giovanni Pellegrino, Bruce Preston, Sarantis Tsiaplias and seminar participants at Deakin University, Monash University, the University of Melbourne, ESAM Hobart 2014, Econometrics Society World Congress, 2015, the Federal Reserve Banks of Atlanta and New York, the Dynare Conference at the National Bank of Belgium, Banco Central do Brasil, and the Sydney Macroeconomics Reading Group. Stephen Elias provided valuable research assistance. This research was supported by ARC DP 160102654. The usual disclaimers apply.