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The Zero Lower Bound and Endogenous Uncertainty

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  • Michael Plante
  • Alexander W. Richter
  • Nathaniel A. Throckmorton

Abstract

This article examines the correlation between uncertainty and real GDP growth. We use the volatility of real GDP growth from a VAR, stock market volatility, survey†based forecast dispersion and macro uncertainty index as proxies for uncertainty. In each case, a stronger negative correlation emerged in 2008. We contend the zero lower bound (ZLB) on the federal funds rate contributed to our finding. To test our theory, we estimate a New Keynesian model with a ZLB constraint to generate a data†driven, forward†looking uncertainty measure. The correlations between that measure and real GDP growth are close to the values in the data.

Suggested Citation

  • Michael Plante & Alexander W. Richter & Nathaniel A. Throckmorton, 2018. "The Zero Lower Bound and Endogenous Uncertainty," Economic Journal, Royal Economic Society, vol. 128(611), pages 1730-1757, June.
  • Handle: RePEc:wly:econjl:v:128:y:2018:i:611:p:1730-1757
    DOI: 10.1111/ecoj.12445
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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