The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model

Yasuo Hirose, Atsushi Inoue

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

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.

Original languageEnglish
JournalJournal of Applied Econometrics
DOIs
Publication statusAccepted/In press - 2015

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equilibrium model
trend
interest rate
cause
Zero lower bound
Dynamic stochastic general equilibrium model
experiment

ASJC Scopus subject areas

  • Economics and Econometrics
  • Social Sciences (miscellaneous)

Cite this

The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model. / Hirose, Yasuo; Inoue, Atsushi.

In: Journal of Applied Econometrics, 2015.

Research output: Contribution to journalArticle

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