Estimating a Nonlinear New Keynesian Model with the Zero Lower Bound for Japan

We estimate a small-scale macroeconomic model for Japan by taking into account the nonlinearity stemming from the zero lower bound (ZLB) of the nominal interest rate. To this end, we apply the Sequential Monte Carlo Squared method to the case of Japan, where the ZLB has constrained the country's monetary policy for a considerably long period. Employing a nonlinear estimation is crucial to deriving implications for monetary policy. For example, the Bayesian model selection suggests that past experience of recessions reducing the nominal interest rate to zero is carried over to today's monetary policy. However, a nonlinear estimation has little effect on the estimate of the natural rate of interest, which has often been negative since the mid-1990s.