On the empirical (Ir)relevance of the zero lower bound constraint

Abstract

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.