Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/333406 
Year of Publication: 
2025
Series/Report no.: 
IMFS Working Paper Series No. 222
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
We estimate a New Keynesian model that allows endogenous transitions between a target equilibrium, with inflation fluctuating around the central bank's target and interest rates typically positive, and a low-inflation equilibrium, where the effective lower bound binds and de-anchored expectations keep inflation persistently below target. The model is estimated using Bayesian methods, employing an ensemble MCMC sampler with a particle filter to handle nonlinearities. We find that the United States remained in the target equilibrium after the global financial crisis, the euro area transitioned to the low-inflation equilibrium in 2015, with the subsequent inflation surge initiating a return to the target equilibrium in 2021, and Japan entered the lowinflation equilibrium in the early 2000s. Bayes factors strongly favor the equilibrium-transition model over an alternative specification in which the lower bound binds only occasionally and expectations remain anchored.
Subjects: 
Multiple Equilibria
Nonlinear Estimation
Particle Filter
Deflation
Zero Lower Bound
Natural Interest Rate
Inflation Expectations
JEL: 
C51
E31
E43
E52
Document Type: 
Working Paper

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