Recent studies using TVP-VAR frameworks have revealed significant changes in the U.S. economy's response to macroeconomic shocks when the Zero Lower Bound (ZLB) constraint is active, particularly in how output and inflation react to demand and supply shocks. The evidence indicates that during ZLB periods, these responses are more pronounced and prolonged, highlighting the limitations of conventional monetary policy under these conditions.
The empirical evidence on how the Zero Lower Bound affects economic responses is mixed, with some studies failing to support the predicted distinct responses. This discrepancy calls into question the reliability of standard New-Keynesian models in real-world scenarios where monetary policy operates under such constraints.
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