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The zero lower bound and endogenous uncertainty

  • Plante, Michael D.

    ()

    (Federal Reserve Bank of Dallas)

  • Richter, Alexander

    ()

    (Auburn University)

  • Throckmorton, Nathaniel

    (Indiana University)

This paper documents a strong negative correlation between macroeconomic uncertainty and real GDP growth since the Great Recession. Prior to that event the correlation was weak, even when conditioning on recessions. At the same time, many central banks reduced their policy rate to its zero lower bound (ZLB), which we contend contributed to the strong correlation between macroeconomic uncertainty and real GDP growth. To test that theory, we use a model where the ZLB occasionally binds. The model roughly matches the correlation in the data—away from the ZLB the correlation is weak but strongly negative when the ZLB binds.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1405.

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Length: 20 pages
Date of creation: 21 May 2014
Date of revision:
Handle: RePEc:fip:feddwp:1405
Contact details of provider: Web page: http://www.dallasfed.org/
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  1. Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "The Zero Lower Bound: Frequency, Duration, and Numerical Convergence," Auburn Economics Working Paper Series auwp2014-09, Department of Economics, Auburn University.
  2. Eric R. Sims, 2012. "Uncertainty and Economic Activity: Evidence from Business Survey Data," Working Papers 014, University of Notre Dame, Department of Economics, revised Jun 2012.
  3. Born, Benjamin & Pfeifer, Johannes, 2014. "Policy risk and the business cycle," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 68-85.
  4. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  5. Alexander Richter & Nathaniel Throckmorton & Todd Walker, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Computational Economics, Society for Computational Economics, vol. 44(4), pages 445-476, December.
  6. Apostolos Serletis, 2012. "Oil Price Uncertainty," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8407, December.
  7. Anton Nakov, 2006. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," Working Papers 0637, Banco de España;Working Papers Homepage.
  8. Fernández-Villaverde, Jesús & Gordon, Grey & Guerron-Quintana, Pablo A. & Rubio-Ramírez, Juan Francisco, 2012. "Nonlinear Adventures at the Zero Lower Bound," CEPR Discussion Papers 8972, C.E.P.R. Discussion Papers.
  9. Jerusalem D. Levhari & T. N. Srinivasan, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 36(2), pages 153-163.
  10. Nathaniel Throckmorton & Benjamin Keen & Alexander Richter & William Gavin, 2013. "Global Dynamics at the Zero Lower Bound," 2013 Meeting Papers 839, Society for Economic Dynamics.
  11. Keith Sill, 2012. "Measuring economic uncertainty using the Survey of Professional Forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 16-27.
  12. Wilbur John Coleman, 1989. "Equilibrium in a production economy with an income tax," International Finance Discussion Papers 366, Board of Governors of the Federal Reserve System (U.S.).
  13. Susanto Basu & Brent Bundick, 2012. "Uncertainty Shocks in a Model of Effective Demand," NBER Working Papers 18420, National Bureau of Economic Research, Inc.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  15. Gust, Christopher & López-Salido, J David & Smith, Matthew E, 2012. "The Empirical Implications of the Interest-Rate Lower Bound," CEPR Discussion Papers 9214, C.E.P.R. Discussion Papers.
  16. Pinter, Gabor & Theodoridis, Konstantinos & Yates, Tony, 2013. "Risk news shocks and the business cycle," Bank of England working papers 483, Bank of England.
  17. Haroon Mumtaz & Francesco Zanetti, 2013. "The Impact of the Volatility of Monetary Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 535-558, 06.
  18. Mendes, Rhys R., 2011. "Uncertainty and the Zero Lower Bound: A Theoretical Analysis," MPRA Paper 59218, University Library of Munich, Germany.
  19. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
  20. repec:mcb:jmoncb:v:45:y:2013:i::p:535-558 is not listed on IDEAS
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