On the Empirical (Ir)relevance of the Zero Lower Bound Constraint
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We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the US economy (2009Q1–2015Q4). We focus on two dimensions of economic performance that were ex-ante likely to have been affected by a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint. We show how a shadow interest rate rule (which we take as a proxy for forward guidance) can reconcile our empirical findings with the predictions of a simple New Keynesian model with a ZLB constraint.
We have benefited from comments from Ben Bernanke, Christian Brownlees, John Cochrane, Marty Eichenbaum, Mark Gertler, Barbara Rossi, Paolo Surico, and Mark Watson and by participants at the NBER Summer Institute, Bicocca University, UPF, Bucharest INFER Workshop, SUFE, ECB, Stockholm School of Economics, Sveriges Riksbank, Finnish Economic Association Congress, and NBER Macroeconomics Annual Conference. We acknowledge the financial support of the Spanish Ministry of Economy and Competitiveness through grants RyC-2016-20476 and ECO-2017-82596-P (Debortoli), ECO-2017-87827 (Galí), and ECO2015-67602-P (Gambetti), and through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563), and the Barcelona Graduate School of Economics. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Jordi Galí is a regular consultant to the Sveriges Riksbank. To his knowledge that institution does not have a financial, ideological, or political stake related to the article. No party had the right to review the paper prior to its circulation.