Zero lower bound on interest rate: application of DSGE model on Czech economy
| Authors | |
|---|---|
| Year of publication | 2014 |
| Type | Article in Proceedings |
| Conference | Proceedings of 32nd International Conference Mathematical Methods in Economics |
| MU Faculty or unit | |
| Citation | |
| Web | Conference proceedings |
| Field | Economy |
| Keywords | zero lower bound on interest rate; DSGE model; occasionally binding constraint |
| Attached files | |
| Description | This paper deals with impacts of zero lower bound of interest rate on behaviour of macroeconomic variables in the Czech economy. The analysis uses DSGE model of small open economy, concretely model from Justiniano and Preston (2004), and toolkit from Guerrieri and Iacoviello (2014) that is able to solve occasionally binding constraint. The model is estimated on data of the Czech economy covering period 1996:Q2 -- 2013:Q4. The behaviour of the model is studied using impulse responses and simulations in reaction to model specific shocks. Situation when central bank is incapable to decrease interest rate because of zero lower bound has implications for behaviour of output and consumption but not inflation. Shocks that cause binding of interest rate for most periods are domestic cost-push shock and foreign preference shock. These two shocks also have non-negligible welfare implications regarding behaviour of consumption. In reaction to three standard deviations of innovations, the drop of consumption was larger by 0.9 and 0.5 percentage points, respectively, when the interest rate hit the zero lower bound. |
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