On the Empirical (Ir)relevance of the Zero Lower Bound Constraint

Davide Debortoli, Jordi Galí, Luca Gambetti

Chapter in NBER book NBER Macroeconomics Annual 2019, volume 34 (2020), Martin S. Eichenbaum, Erik Hurst, and Jonathan A. Parker, editors (p. 141 - 170)
Conference held April 11-12, 2019
Published in March 2020 by University of Chicago Press
© 2020 by the National Bureau of Economic Research
in Macroeconomics Annual Book Series

We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the U.S. economy (2009Q1–2015Q4). We focus on two dimensions of economic performance that were ex-ante likely to have been affected by a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint. We show how a shadow interest rate rule (which we take as a proxy for forward guidance) can reconcile our empirical findings with the predictions of a simple New Keynesian model with a ZLB constraint.

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Document Object Identifier (DOI): 10.1086/707177