“The Zero Lower Bound and Estimation Accuracy“ with Tyler Atkinson and Alex Richter
Journal of Monetary Economics, November 2020, Volume 115, Pages 249-264
FRB Dallas Working Paper 1804
Online Appendix

During the Great Recession, central banks lowered their policy rate to the zero lower bound (ZLB), calling into question linear estimation methods. There are two alternatives: estimate a nonlinear model that accounts for precautionary savings effects of the ZLB or a piecewise linear model that is faster but ignores the precautionary savings effects. This paper compares their accuracy using artificial datasets. The predictions of the nonlinear model are typically more accurate than the piecewise linear model, but the differences are usually small. There are far larger gains in accuracy from estimating a richer, less misspecified piecewise linear model.