Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data

Sep 18, 2026

The paper tests a New Keynesian prediction: positive supply shocks should be less expansionary at the zero lower bound (ZLB) under periods of constrained monetary policy. Empirically, it uses Fernald’s (2014) utilization-adjusted total factor productivity series as a proxy for exogenous productivity. Contrary to the model’s expansionary implication, positive productivity shocks are found to be more expansionary at the ZLB than in normal times. At the same time, consistent with the model, they exert a stronger negative effect on inflation at the ZLB.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages26

Reading Time1 h 6 min

AccessFree to download

Introduction

Empirical setup and identification strategy

Main findings on output responses

Effects on inflation and robustness

NBER WORKING PAPER SERIES ARE SUPPLY SHOCKS CONTRACTIONARY AT THE ZLB? EVIDENCE FROM UTILIZATION-ADJUSTED TFP DATA Julio Garín Robert Lester Eric Sims Working Paper 22311 [http://www.nber.org/papers/w22311](http://www.nber.org/papers/w22311) NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 June 2016 We are grateful to Ruediger Bachmann, Bill Lastrapes, and Ron Mau for helpful comments and suggestions which have improved the paper. The usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2016 by Julio Garín, Robert Lester, and Eric Sims. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data Julio Garín, Robert Lester, and Eric Sims NBER Working Paper No. 22311 June 2016 JEL No. E31,E32,E43,E52 ABSTRACT The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald's (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. However, in line with the predictions of the basic model, positive productivity shocks have a stronger negative effect on inflation at the ZLB. Julio Garín Department of Economics Terry College of Business University of Georgia 512 Brooks Hall 310 Herty Drive Athens, GA 30602 [jgarin@uga.edu](jgarin@uga.edu) Robert Lester Department of Economics Colby College Diamond, 3rd floor 5230 Mayflower Hill Waterville, ME 04901 [rblester@colby.edu](rblester@colby.edu) Eric Sims Department of Economics University of Notre Dame 723 Flanner Hall South Bend, IN 46556 and NBER[esims1@nd.edu](esims1@nd.edu) 1 Introduction Are positive supply shocks contractionary in periods where monetary policy is constrained by the zero lower bound (ZLB)? The textbook New Keynesian (NK) model suggests that this is a possibility. The potential for this paradoxical result is driven by general equilibrium e􀀋ects. Suppose that the supply shock is an increase in neutral productivity. Higher productivity lowers the natural rate of interest (i.e. the real interest rate consistent with a hypothetical equilibrium where prices are 􀀍exible) . An in􀀍ation-targeting central bank can optimally respond by lowering nominal interest rates, which allows output to expand. If the central bank is constrained by the zero lower bound, however, nominal interest rates cannot fall. This results in a decrease in current and expected future in􀀍ation, which drives the equilibrium real interest rate up. The increase in the real interest rate chokes o􀀋 demand, resulting in a smaller output increase than if policy were active. If the expected duration of the ZLB is long enough, the rise in the real interest rate can be su􀀎ciently large that output declines. In this paper we empirically test this prediction of the NK model using aggregate US data. Until very recently this has been a virtual impossibility, given the paucity of aggregate time series observations where the ZLB was binding. But there are now seven years of data (from the end of 2008 through the end of 2015) in which the e􀀋ective Federal Funds Rate was at zero. We use Fernald (2014)'s utilization-adjusted total factor productivi

FAQs

What prediction does the basic New Keynesian model make about supply shocks at the ZLB?

It predicts that positive supply (productivity) shocks are less expansionary at the ZLB than when monetary policy is active, because constraints on nominal interest rates affect inflation and the real interest rate.

What data and method does the paper use to test the prediction?

It uses Fernald’s (2014) utilization-adjusted TFP series as a measure of exogenous productivity and estimates impulse responses of output to productivity changes using Jordà (2005) local projections.

What are the paper’s main empirical results on output and inflation at the ZLB?

Output responds more on impact to productivity increases at the ZLB than away from it, while productivity shocks have a stronger negative effect on inflation at the ZLB.

Sep 18, 2026

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