Abstract
We investigate how the Federal Reserve (Fed) hit the zero lower bound (ZLB) interest rate while operating under a Taylor-type policy rule. We estimate a reaction function, and the results indicate that during the crisis Fed increased the weight on output without also increasing the weight on inflation which led them to hit the ZLB.0
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Notes
1 Dummies are selected according to the test results of Carrion-i-Silvestre et al. (2009). Other dummies are ignored because they are statistically insignificant at the conventional levels. These dummies are constructed as follows: DUM73 = 1 from 1973Q1 to 1974Q4 and 0 otherwise, DUM80 = 1 from 1980Q1 to 1981Q4 and 0 otherwise and DUM91 = 1 from 1991Q1 to 1992Q4 and 0 otherwise.
2 For example, DUMFC in 1954Q3 to 2007Q1 sample is constructed as 1 in 2007Q1 and 0 otherwise. DUMFC in 1954Q3 to 2007Q2 sample is constructed as 1 in 2007Q1 and 2007Q2 and 0 otherwise. A similar process is used to construct DUMFC for samples beyond 2007Q2.
3 Estimates of the intercept and dummies are not reported for brevity.
4 The t-statistics or p-values are not reported for brevity.
5 We derive price volatility using the GDP deflator. GARCH model was used to attain the series.