The magnitude of the global financial crisis of 2007–8 and the recession
that it triggered ledmany central banks to lower their policy rates down
to values near zero, their theoretical lower bound.1 In the United States,
the target for the federal funds rate remained at zero for 7 years, from
January 2009 through December 2015. During that period, the shortterminterest
rate stopped playing its role as an instrument ofmacroeconomic
stabilization. Was the performance of the US economy affected
by ...
The magnitude of the global financial crisis of 2007–8 and the recession
that it triggered ledmany central banks to lower their policy rates down
to values near zero, their theoretical lower bound.1 In the United States,
the target for the federal funds rate remained at zero for 7 years, from
January 2009 through December 2015. During that period, the shortterminterest
rate stopped playing its role as an instrument ofmacroeconomic
stabilization. Was the performance of the US economy affected
by the binding zero lower bound (ZLB)? The present paper seeks to provide
an answer to that question.More specifically, our goal is to evaluate
the merits of what we refer to as the “ZLB empirical irrelevance hypothesis”
(or the “irrelevance hypothesis,” for short), that is, the hypothesis
that the economy’s performance was not affected by the binding ZLB
constraint, in practice, during the recent US episode. In particular, we focus
on two dimensions of that performance that were ex ante likely to
have experienced the impact of a binding ZLB: (i) the volatility of macro
variables and (ii) the economy’s response to shocks.
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