Posted

February 18, 2015 04:36:31 AM

Date

2014-12

Author

Mariano Kulish, James Morley, and Tim Robinson

Affiliation

School of Economics, Australian School of Business, the University of New South Wales); School of Economics, Australian School of Business, the University of New South Wales; and Melbourne Institute of Applied Economics and Social Research, University of Melbourne

Title

Estimating DSGE models with forward guidance

Summary /
Abstract

Motivated by the use of forward guidance, we propose a method to estimate DSGE models in which the central bank holds the policy rate fixed for an extended period. Private agents’ beliefs about how long the fixed-rate regime will last influences, among other observable variables, current output, inflation and interest rates of longer maturities. We estimate the shadow policy rate and construct counterfactual scenarios to quantify the severity of the zero lower bound constraint. Using the Smets and Wouters (2007) model, we find that the expected duration of the zero interest rate policy has been around 2 years, that the shadow rate has been around -3 per cent and that the zero lower bound has imposed a significant output loss.

Keywords

Zero lower bound, forward guidance

URL

http://research.economics.unsw.edu.au/RePEc/papers/2014-32.pdf

See

More articles ...