Structural-empirical macroeconomic analysis using nonlinear eodels with the ZLB

• Applicant: Dr. Gregor Böhl
• Subject Area: Economic Theory ; Statistics and Econometrics ; Economic Policy, Applied Economics
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 441540692

The Global Financial Crisis and the Great Recession challenged economists to deal with phenomena that are new to many advanced economies. One is the zero lower bound (ZLB) on nominal interest rates. In response to the sharp decline in economic activity, central banks in major advanced countries reduced nominal interest rates to historically low levels. Unable to lower interest rates any further, many central banks resorted to unconventional policy tools such as quantitative easing in order to deliver additional monetary stimulus. Yet, economists and policy makers are still debating about the macroeconomic effects of these unconventional measures -- did the measures have any effects, and if so, what are the effects? Much related, economists are puzzled by the lack of deflation in the USA and European countries during the Great Recession. In spite of substantial losses in output and employment inflation declined only moderately. This led to doubts whether the traditional Phillips curve relationship still exists.The binding ZLB constraint on nominal interest rates poses a major problem for a quantitative-structural analysis. Traditional solution, filtering and estimation methods typically do no work in the presence of a nonlinearity such as the ZLB. Existing alternatives tend to be computationally demanding. I provide new methods to solve, filter, and estimate dynamic-stochastic general equilibrium (DSGE) models with a binding effective lower bound on nominal interest rates (ELB) efficiently, robust, and fast. The estimated model enables to structurally assess the macroeconomic effects of QE, to conduct counterfactual analysis, run policy simulations and investigate the risks of QE both in the short and long-run. Using my methodology, I study recent macroeconomic problems. First, I estimate a set of DSGE models with financial frictions and banks to investigate and quantify the macroeconomic effects of unconventional monetary policy during and after the Global Financial Crisis. My analysis allows to assess potential long-run benefits and risks of unconventional monetary policy. The important advantage of my methodology is that is allows to estimate the DSGE model taking into account the time period in which QE was conducted. Second, I propose a novel explanation for the seemingly dead Phillips curve, providing a consistent explanation for the lack of disinflation during the Great Recession. The role of firms' marginal finance costs for the pricing decision plays a key role in this explanation, in particular in regard to the role of the ZLB in times of financial distress. I use my methodology to empirically test this explanation against alternative theories. Third, I provide updated estimates of structural parameters for the US and the Euro Area based standard DSGE models including the ZLB.

• DFG Programme: Research Grants