We build a small-scale nonlinear quadratic (NLQ) model in which credit feedback and regime switches in the output gap affect the adjustment path of the economy towards a steady state. The central bank solves a finite-horizon decision problem where the policy rate also can be zero or negative. We estimate this model by nonlinear seemingly unrelated regression method (NLSUR) and using the parameters to explore policy scenarios. The latter projects long-run dynamics after a large demand contraction leading to scarring effects on the economy. We point out three main results. First, while scars are dominant when the central bank follows a standard Taylor rule, unconventional monetary policy (UMP) - such as Quantitative Easing - mitigates the output decline in both the short and the long run. Second, a zero natural interest rate curtails the central bank's ability to adjust the economy and mitigate scars. Third, financial constraints leave the deepest scars even if UMP is active.

Long-run scarring effects of meltdowns in a small-scale nonlinear quadratic model / Lucidi, F. S.; Semmler, W.. - In: JOURNAL OF MACROECONOMICS. - ISSN 0164-0704. - 75:(2023), p. 103487. [10.1016/j.jmacro.2022.103487]

Long-run scarring effects of meltdowns in a small-scale nonlinear quadratic model

Lucidi F. S.
;
Semmler W.
2023

Abstract

We build a small-scale nonlinear quadratic (NLQ) model in which credit feedback and regime switches in the output gap affect the adjustment path of the economy towards a steady state. The central bank solves a finite-horizon decision problem where the policy rate also can be zero or negative. We estimate this model by nonlinear seemingly unrelated regression method (NLSUR) and using the parameters to explore policy scenarios. The latter projects long-run dynamics after a large demand contraction leading to scarring effects on the economy. We point out three main results. First, while scars are dominant when the central bank follows a standard Taylor rule, unconventional monetary policy (UMP) - such as Quantitative Easing - mitigates the output decline in both the short and the long run. Second, a zero natural interest rate curtails the central bank's ability to adjust the economy and mitigate scars. Third, financial constraints leave the deepest scars even if UMP is active.
2023
nonlinear quadratic model; credit feedback; unconventional monetary policy; scarring effects
01 Pubblicazione su rivista::01a Articolo in rivista
Long-run scarring effects of meltdowns in a small-scale nonlinear quadratic model / Lucidi, F. S.; Semmler, W.. - In: JOURNAL OF MACROECONOMICS. - ISSN 0164-0704. - 75:(2023), p. 103487. [10.1016/j.jmacro.2022.103487]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/1679965
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