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Measuring Exchange Rate, Price, and Output Dynamics at the Effective Lower Bound
Author(s) -
Bäurle Gregor,
Kaufmann Daniel
Publication year - 2018
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12260
Subject(s) - economics , new keynesian economics , exchange rate , upper and lower bounds , bayesian probability , econometrics , monetary policy , monetary economics , interest rate , zero lower bound , impulse response , mathematics , statistics , mathematical analysis
New Keynesian models with sticky prices make stark predictions about how the economy responds to shocks under different monetary policy regimes when short‐term interest rates are constrained by an effective lower bound. We use the Swiss case as a laboratory to find evidence in favour of these predictions. We propose a Bayesian VAR to estimate impulse responses to risk shocks for short periods with a binding effective lower bound and with a publicly announced minimum exchange rate. In line with predictions from theory, we find that with a binding effective lower bound, the responses of the exchange rate, prices, and output become more persistent. However, the minimum exchange rate attenuates this adverse impact.