US business cycle dynamics at the zero lower bound

Using a nonlinear Bayesian likelihood approach that fully accounts for the lower bound on nominal interest rates, we analyze US post-crisis macroeconomic dynamics and provide reference parameter estimates. We find that despite the attention received in the literature, neither the inclusion of financial frictions nor that of household heterogeneity improves the empirical fit of the standard model or its ability to provide a joint explanation for the post-2007 dynamics. Associated financial shocks mis-predict an increase in consumption. We illustrate that the common practice of omitting the ZLB period in the estimation severely distorts the analysis of the latest economic dynamics.