Acta Univ. Agric. Silvic. Mendelianae Brun. 2016, 64(2), 603-616 | DOI: 10.11118/actaun201664020603

The Empirical Implications of the Zero Lower Bound on the Interest Rate: The Case of the Czech Economy

Miroslav Hloušek

Faculty of Economics and Administration, Masaryk University, Lipová 41a, 602 00 Brno, Czech Republic

This paper uses an estimated DSGE model of the Czech economy to study the macroeconomic implications of various shocks when the interest rate is constrained by the zero lower bound. The goal is to identify which shocks represent threats for the economy and how large the distortions are. The results show that four single shocks can take the economy to the zero lower bound, and that of the four, productivity shock in the tradable sector is the most dangerous. The consequences for the behaviour of macroeconomic variables are nontrivial and, quite naturally, increase with the size of the shock and the frequency of occurrence. If the economy is subject to all model specific shocks, there are distortions in terms of lower average values of output and consumption (by more than one percentage point) and higher inflation volatility (by more than six percentage points). To reduce these costs, the central bank should give higher weight to inflation and lower weight to the output gap in monetary policy rule.

Keywords: zero lower bound on interest rate, DSGE model, occasionally binding constraint, monetary policy

Grants and funding:

This paper is supported by specific research project No. MUNI/A/1049/2015 at Masaryk University and by research project of the Czech Science Foundation No. GA16-11223S.

Prepublished online: May 4, 2016; Published: May 1, 2016  Show citation