Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries
We propose and solve a small-scale New-Keynesian model with Markov sunspot shocks that move the economy between a targeted-inflation regime and a deflation regime and fit it to data from the U.S. and Japan. For the U.S. we find that adverse demand shocks have moved the economy to the zero lower bound (ZLB) in 2009 and an expansive monetary policy has kept it there subsequently. In contrast, Japan has experienced a switch to the deflation regime in 1999 and remained there since then, except for a short period. The two scenarios have drastically different implications for macroeconomic policies. Fiscal multipliers are about 20% smaller in the deflationary regime, despite the economy remaining at the ZLB. While a commitment by the central bank to keep rates near the ZLB doubles the fiscal multipliers in the targeted-inflation regime (U.S.), it has no effect in the deflation regime (Japan).
This paper previously circulated under the title "Macroeconomic Dynamics Near the ZLB: A Tale of Two Equilibria". We are thankful for helpful comments and suggestions from Saroj Bhattarai, Jeff Campbell, Hiroshi Fujiki, Hidehiko Matsumoto, Karel Mertens, Morten Ravn, Stephanie Schmitt-Grohe, Mike Woodford, and seminar participants at the 2012 Princeton Conference in Honor of Chris Sims, the Bank of Italy, the 2013 Bank of England - LSE Conference, the 2014 AEA Meetings, the Board of Governors, Boston College, the Federal Reserve Banks of Chicago, Kansas City, New York, Philadelphia, and Richmond, the National Bank of Belgium, Texas A&M University, UC San Diego, University of Maryland, University of Pennsylvania, and UQAM. Much of this paper was written while Aruoba and Schorfheide visited the Federal Reserve Bank of Philadelphia, whose hospitality they are thankful for. The authors gratefully acknowledge financial support from the National Science Foundation under Grant SES 1061725. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
S Borağan Aruoba Pablo Cuba-Borda Frank Schorfheide The Review of Economic Studies, Volume 85, Issue 1, 1 January 2018, Pages 87–118, https://doi.org/10.1093/restud/rdx027 citation courtesy of