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The effects of the near-zero interest rate policy in a regime-switching dynamic stochastic general equilibrium model

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  • Chen, Han

Abstract

Standard Dynamic Stochastic General Equilibrium (DSGE) models cannot explain the near-zero interest rate policy (near-ZIRP) by the Federal Reserve. I study two methods of modeling the near-ZIRP in DSGE models: the perfect foresight model and the Markov regime-switching model developed in this paper. The near-ZIRP has a significant expansionary effect, and the regime-switching model generates a more realistic predicted path of macro variables than the perfect foresight model. Furthermore, the government purchases multiplier in the near-ZIRP regime is smaller than what the literature finds at the zero lower bound (ZLB), and the contractionary effects of higher productivity found by the recent literature at the ZLB are not present in the regime-switching model.

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  • Chen, Han, 2017. "The effects of the near-zero interest rate policy in a regime-switching dynamic stochastic general equilibrium model," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 176-192.
    • Handle: RePEc:eee:moneco:v:90:y:2017:i:c:p:176-192
    DOI: 10.1016/j.jmoneco.2017.06.006
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    2. S. Bogan Aruoba & Pablo Cuba-Borda & Kenji Higa-Flores & Frank Schorfheide & Sergio Villalvazo, 2021. "Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 96-120, July.
    3. Gerke, Rafael & Giesen, Sebastian & Kienzler, Daniel, 2020. "Interest rate pegs and the reversal puzzle: On the role of anticipation," Discussion Papers 50/2020, Deutsche Bundesbank.
    4. S. Bogan Aruoba & Pablo Cuba-Borda & Kenji Higa-Flores & Frank Schorfheide & Sergio Villalvazo, 2021. "Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 96-120, July.
    5. Li, Shaoyu & Zhang, Yuanyuan & Zhu, Chunhui, 2021. "A closed-form exact solution for pricing fixed-income variance swaps with affine-jump model," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    6. Tolga Özden, 2021. "Heterogeneous Expectations and the Business Cycle at the Effective Lower Bound," Working Papers 714, DNB.
    7. Harrison, Richard & Waldron, Matt, 2021. "Optimal policy with occasionally binding constraints: piecewise linear solution methods," Bank of England working papers 911, Bank of England.

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