On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint
The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of 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, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.
We have benefited from comments from Christian Brownlees, Marty Eichenbaum, Barbara Rossi and by participants at the NBER Summer Institute, Bicocca University, UPF, Bucharest INFER Workshop, SUFE, ECB, Stockholm School of Economics and Sveriges Riksbank. Luca Gambetti acknowledges the financial support of the Spanish Ministry of Economy and Competitiveness through grant ECO2015-67602-P. The three authors acknowledge the support of 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.
On the Empirical (Ir)relevance of the Zero Lower Bound Constraint, Davide Debortoli, Jordi Galí, Luca Gambetti. in NBER Macroeconomics Annual 2019, volume 34, Eichenbaum, Hurst, and Parker. 2020