Identification at the zero lower bound

Journal article

Abstract:: I show that the Zero Lower Bound (ZLB) on interest rates can be used to identify the causal effects of monetary policy. Identification depends on the extent to which the ZLB limits the efficacy of monetary policy. I develop a general econometric methodology for the identification and estimation of structural vector autoregressions (SVARs) with an occasionally binding constraint. The method provides a simple way to test the efficacy of unconventional policies, modelled via a `shadow rate'. I apply this method to U.S. monetary policy using a three-equation SVAR model of inflation, unemployment and the federal funds rate. I reject the null hypothesis that unconventional monetary policy has no effect at the ZLB, but find some evidence that it is not as effective as conventional monetary policy.

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Copyright holder:: Sophocles Mavroeidis.
Rights statement:: © 2021 The Author. Econometrica published by John Wiley & Sons Ltd on behalf of The Econometric Society. Sophocles Mavroeidis is the corresponding author on this paper. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Notes:: This is the accepted manuscript version of the article. The final version will be available from a forthcoming edition of Econometrica.

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