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THE LIKELIHOOD OF EFFECTIVE LOWER BOUND EVENTS

Published online by Cambridge University Press:  23 January 2020

Michal Franta
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Abstract

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This paper provides estimates of the probability of an economy hitting its effective lower bound (ELB) on the nominal interest rate and of the expected duration of such an event for eight advanced economies. To that end, a mean-adjusted panel vector autoregression with static interdependencies and the possibility of regime change is estimated. The simulation procedure produces ELB risk estimates for both the short term, where the current phase of the business cycle plays an important role, and the medium term, where the occurrence of an ELB situation is determined mainly by the equilibrium values of macroeconomic variables. The paper also discusses the ELB event probability estimates with respect to previous approaches used in the literature.

Keywords

Effective Lower BoundELB RiskPanel VARRegime Change

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 8 , December 2021, pp. 2058 - 2079
Copyright
© Cambridge University Press 2020

Footnotes

I would like to thank Tomáš Adam, Leonardo Gambacorta, Elmar Mertens, Jouchi Nakajima, the Associate Editor and two referees, and seminar participants at the Bank for International Settlements and the Czech National Bank for valuable comments. I completed this project while visiting the Bank for International Settlements under the Central Bank Research Fellowship program. The opinions expressed in this paper are those of the author and do not necessarily reflect those of the Czech National Bank or of the Bank for International Settlements.

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