Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

By S. Bora, Gan Aruoba, Pablo A. Cuba-Borda, Frank Schorfheide, Saroj Bhattarai, Jeffrey R. Campbell, Hiroshi Fujiki, Hideteru Matsumoto, Karel Mertens, Morten O. Ravn and 2 more. 2016

224 citations recorded by the source corpus.

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).

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/8429aef46e459a26f5eeff054c99684de434424e

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In Economics and Econometrics

Citations in the corpus

A shadow rate New Keynesian model (2016, unknown): “Another strand of literature uses global projection methods to approximate agents’ decision rules, such as Gust et al. (forthcoming), Fernández-Villaverde et al. (2015), and Aruoba et al. (2016).”
A generalized approach to indeterminacy in linear rational expectations models (2017, methodology): “More recently, Aruoba et al. (2018) study inflation dynamics at the Zero Lower Bound (ZLB) and during an exit from the ZLB. The paper closest to our is Farmer et al. (2015). The main difference between the two approaches is that our method accommodates the case of both determinacy and indeterminacy ”
Liquidity Traps and Jobless Recoveries (2017, background): “Aruoba, Cuba-Borda, and Schorfheide (2014), for example, estimate a model with fundamental and non-fundamental shocks.”