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The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model
Author(s) -
Hirose Yasuo,
Inoue Atsushi
Publication year - 2015
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2447
Subject(s) - dynamic stochastic general equilibrium , zero lower bound , economics , impulse response , econometrics , impulse (physics) , monte carlo method , nominal interest rate , interest rate , monetary policy , mathematics , statistics , real interest rate , keynesian economics , physics , macroeconomics , mathematical analysis , quantum mechanics
Summary This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound (ZLB) constraint on the nominal interest rate. Our Monte Carlo experiments using a standard sticky‐price DSGE model show that no significant bias is detected in parameter estimates and that the estimated impulse response functions are quite similar to the true ones. However, as the frequency of being at the ZLB or the duration of ZLB spells increases, the parameter bias becomes larger and therefore leads to substantial differences between the estimated and true impulse responses. It is also demonstrated that the model missing the ZLB causes biased estimates of structural shocks even with the virtually unbiased parameters. Copyright © 2015 John Wiley & Sons, Ltd.