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AN ESTIMATED DSGE MODEL WITH A DEFLATION STEADY STATE

Published online by Cambridge University Press:  14 November 2018

Yasuo Hirose
Yasuo Hirose*
Affiliation:
Keio University
*
Address correspondence to: Yasuo Hirose, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan; e-mail: yhirose@econ.keio.ac.jp.
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Abstract

Benhabib et al. [(2001) Journal of Economic Theory 96, 40–69] argue that there exists a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, positive shocks to households’ preferences and wage markup, and a negative shock to monetary policy do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that sunspot shocks have a limited effect on Japan’s output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.

Keywords

DeflationZero Interest RateEquilibrium IndeterminacyBayesian Estimation
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 5 , July 2020 , pp. 1151 - 1185
Copyright
© Cambridge University Press 2018

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Footnotes

The author would like to thank Kosuke Aoki, Roc Armenter, Saroj Bhatarai, Brent Bundick, Richard Dennis, Thorsten Drautzburg, Roger Farmer (Co-Editor), Shigeru Fujita, Ippei Fujiwara, Ichiro Fukunaga, Pablo Guerron, Basant Kapur, Tomoo Kikuchi, Lutz Kilian, Junko Koeda, Keiichiro Kobayashi, Teruyoshi Kobayashi, Takushi Kurozumi, Riccardo Maria Masolo, Colin McKenzie, Makoto Nakajima, Taisuke Nakata, Makoto Nirei, Masao Ogaki, Matthias Paustian, Toshitaka Sekine, Etsuro Shioji, Keith Sill, Takeki Sunakawa, Yuki Teranishi, Denis Tkachenko, Hajime Tomura, Kozo Ueda, Michel van der Wel, Tsutomu Watanabe, two anonymous referees, and seminar and conference participants at Bank of Japan, Federal Reserve Bank of Philadelphia, Keio University, Kobe University, Ministry of Finance Japan, National University of Singapore, DSGE Conference at National Taiwan University, Dynare Conference, International Association for Applied Econometrics Annual Conference, International Conference on Computing in Economics and Finance, Summer Workshop on Economic Theory, and World Congress of the Econometric Society for insightful comments and suggestions.

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