The Natural Rate of Interest in a Nonlinear DSGE Model

CAMA Working Paper 38/2017
Author name: 
Yasuo Hirose
Takeki Sunakawa

This paper investigates how and to what extent nonlinearity, including the zero lower bound on the nominal interest rate, affects the estimates of the natural rate of interest in a dynamic stochastic general equilibrium model with sticky prices and wages. We find that the estimated natural rate of interest in a nonlinear model is substantially different from that in its linear counterpart because of a contractionary effect of the zero lower bound, and that other nonlinearities such as price and wage dispersion, from which a linear model abstracts, play a minor role in identifying the natural rate.

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