Collaborative Research: Monetary DSGE Models at the Zero Lower Bound: Policy Analysis and Econometric Inference

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

This award funds research in macroeconomics, focusing on the development of tools and methods for building and testing mathematical models of an entire economy. The goal is to better understand how economies operate when nominal interest rates are very close or equal to zero; standard models use mathematical assumptions that do not work well with 0% interest. These challenges limit the ability of researchers to study the causes of business cycle fluctuations when an economy is near this interest rate. Because policymakers use some of the same modeling methods, the challenges also affect policymakers' ability to understand the possible effects of changes in monetary policy. The PIs will develop new algorithms and methods for modeling economies with 0% interest. The PIs will examine monetary policy analysis at the Zero Lower Bound (ZLB), considering the effects of forward guidance at the ZLB and characterizing the optimal target inflation rate when the ZLB is a constraint and there are also realistic frictions that generate money demand. They will consider the multiple equilibrium problem caused by impose the ZLB in many DSGE models by considering two specific equilibria, one in which inflation and inflation expectations drift slowly, and one where the change in regimes is triggered by fundamental shocks. Finally, the team will develop two kinds of nonlinear vector autoregressive models that mimic the nonlinearities in the DSGE model without imposing tight cross-coefficient restrictions.