Transcript The Effects of Foreign Shocks when Interest Rates are at Zero M

The Effects of Foreign Shocks
when Interest Rates are at Zero
M. Bodenstein, C. J. Erceg, L. Guerrieri
Discussion by Ricardo Mestre
Macroeconomic Modelling Workshop
Jerusalem, 28-29 October 2009
Structure of presentation
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Brief description of goals of paper
Remarks on stability properties under the ZLB
Some issues on the exercise
Some issues on the model
Great job done by authors!
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Summary of paper
• The paper analyses foreign demand shocks in ZLB
times
• Using a two-bloc DSGE model of the US & the RoW
• Issue: trade spillovers with & w/o ZLB event
• Conclusion: trade spillover much higher in ZLB
• Why? Due to non-reaction of monetary policy
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Dynamics in the ZLB
• The interest rate does no longer stabilise
• In most cases, the ZLB leads to multiple equilibria
• Is this the case in SIGMA?
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Dynamics in the ZLB
• Multiple equilibria: one forward (unstable) root becomes
backward (stable) root
• A return to the stable region is assured in the exercise
• Variables affected jump downward, then return to base
• The jump is (in models of this kind) expectation-driven
• Hence, importance of managing expectations
• Demand shocks matter!
• What about fiscal in the paper?
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Evidence with alternative model
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Evidence with alternative model (II)
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Solution method
• The solution method seems as implemented in Troll
• End point: why not long simulations?
• Risks of non-linear models & steady state (Benhabib
et al., 2001): deserves a comment
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Monetary policy rule
• Gradualism vs. activism: persistent rule may avoid the ZLB
• Reasons given in paper are not convincing
• How does it work?
– Low rate mobility reduces the likelihood of hitting the ZLB
(but worsen output, inflation)
– BUT: if ZLB hit, chances are that output, inflation will worsen
• Avoiding the ZLB matters!
• Ergo: important to simulate with alternative γi (see previous point)
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Further Evidence
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Model: price elasticity
• Demand elasticity at firm level same for domestic
production and exports (0.1)
• Sure, demand is simpler to model, but:
– Is this the evidence?
• Import content of consumption and investment goods
is the same:
– Again, is this the best empirical choice?
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Model: pricing mechanisms
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Model is symmetric LCP
What about asymmetric PCP(US)/LPC(RoW)?
US exporters are PCP: higher impact on exports
RoW exporters are LPC: less transmission to US
imports & US prices
• Isn’t this the empirically relevant setup?
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Minor points
• Why using inot in the rule?
• Justification seems weak:
– Little extra delay in exiting the ZLB
– Use of inot implies odd kind of policy!
• Why are spillovers not returning to non-ZLB case
when the ZLB does not bind?
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Minor points (II)
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END OF PRESENTATION
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