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

NBER Working Paper No. 25820

Issued in May 2019

NBER Program(s):Economic Fluctuations and Growth, Monetary Economics



The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of 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, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.

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Document Object Identifier (DOI): 10.3386/w25820

Published: On the Empirical (Ir)relevance of the Zero Lower Bound Constraint, Davide Debortoli, Jordi Galí, Luca Gambetti. in NBER Macroeconomics Annual 2019, volume 34, Eichenbaum, Hurst, and Parker. 2020