AN ESTIMATED DSGE MODEL with A DEFLATION STEADY STATE

Research output: Contribution to journalArticle

Abstract

Benhabib et al. [(2001) Journal of Economic Theory 96, 40-69] argue that there exists a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, positive shocks to households' preferences and wage markup, and a negative shock to monetary policy do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that sunspot shocks have a limited effect on Japan's output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.

Original languageEnglish
JournalMacroeconomic Dynamics
DOIs
Publication statusAccepted/In press - 2018 Jan 1

Fingerprint

Dynamic stochastic general equilibrium
Deflation
Sunspots
Fluctuations
Markup
Japanese economy
Bank of Japan
DSGE models
Global financial crisis
Inflation rate
Interest rate policy
Japan
Monetary policy rules
Nominal interest rate
Zero lower bound
Economic theory
Inflation
Household
Monetary policy
Output fluctuations

Keywords

  • Bayesian Estimation
  • Deflation
  • Equilibrium Indeterminacy
  • Zero Interest Rate

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

AN ESTIMATED DSGE MODEL with A DEFLATION STEADY STATE. / Hirose, Yasuo.

In: Macroeconomic Dynamics, 01.01.2018.

Research output: Contribution to journalArticle

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