Identification of Structural Shocks under the Zero Lower Bound on Nominal Interest Rates

November 2, 2012
Kosuke Aoki^*1
Yoichi Ueno^*2

Abstract

We propose a simple and tractable method to estimate linear DSGE models with the zero lower bound on nominal interest rates. Our method makes use of forward rate curves in order to take into account the effects of the zero lower bound on equilibrium endogenous variables without relying on nonlinear techniques for solving rational expectation equilibrium. Applying the method to Japanese data, we find that the natural interest rate might not have declined to negative values in the late 90s and 2000s. Counterfactual simulations show that the Bank of Japan's zero interest rate policy and quantitative easing policy in those periods had expansionary effects by bull flattening the yield curves.

We thank Hibiki Ichiue, Daisuke Ikeda, Koichiro Kamada, Ryo Kato, Takeshi Kimura, Takushi Kurozumi, Kenji Nishizaki, Masashi Saito, Toshitaka Sekine, and Nao Sudo for useful comments. The views expressed here are those of the authors and should not be interpreted as those of the Bank of Japan.

*1 Faculty of Economics, University of Tokyo
E-mail : kaoki@e.u-tokyo.ac.jp
*2 Research and Statistics Department (currently Monetary Affairs Department), Bank of Japan
E-mail : youichi.ueno@boj.or.jp

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