Premium
Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?
Author(s) -
CHUNG HESS,
LAFORTE JEANPHILIPPE,
REIFSCHNEIDER DAVID,
WILLIAMS JOHN C.
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00478.x
Subject(s) - zero lower bound , great moderation , economics , inflation (cosmology) , econometrics , asset (computer security) , constraint (computer aided design) , financial crisis , zero (linguistics) , monetary policy , monetary economics , macroeconomics , mathematics , linguistics , philosophy , physics , geometry , computer security , theoretical physics , computer science
Prior to the financial crisis, most economists probably did not view the zero lower bound (ZLB) as a major problem for central banks. Using a range of structural and statistical models, we find that previous research understated the ZLB threat by ignoring uncertainty about model parameters and latent variables, focusing too much on the Great Moderation experience, and relying on structural models whose dynamics cannot generate sustained ZLB episodes. Our analysis also suggests that the Federal Reserve's asset purchases, while materially improving macroeconomic conditions, did not prevent the ZLB constraint from having first‐order adverse effects on real activity and inflation.