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This paper uses an estimated DSGE model of the Czech economy tostudy the macroeconomic implications of various shocks when theinterest rate is constrained by the zero lower bound. The goalis to identify which shocks represent threats for the economyand how large the distortions are. The results show that foursingle shocks can take the economy to the zero lower bound, andthat of the four, productivity shock in the tradable sector isthe most dangerous. The consequences for the behaviour ofmacroeconomic variables are nontrivial and, quite naturally,increase with the size of the shock and the frequency ofoccurrence. If the economy is subject to all model specificshocks, there are distortions in terms of lower average valuesof output and consumption (by more than one percentage point)and higher inflation volatility (by more than six percentagepoints). To reduce these costs, the central bank should givehigher weight to inflation and lower weight to the output gapin monetary policy rule.

The Empirical Implications of the Zero Lower Bound on the Interest Rate: The Case of the Czech Economy