Identification at the Zero Lower Bound

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’. Application of the method to US monetary policy using a three-equation SVAR model in inflation, unemployment and the federal funds rate provides some evidence that unconventional policies are partially effective.

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