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S Borağan Aruoba, Pablo Cuba-Borda, Frank Schorfheide, Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries, The Review of Economic Studies, Volume 85, Issue 1, January 2018, Pages 87–118, https://doi.org/10.1093/restud/rdx027
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Abstract
We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium, a sunspot shock can move the economy from a regime in which inflation is close to the central bank’s target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A non-linear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.
