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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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File URL: http://www.dallasfed.org/assets/documents/research/papers/2014/wp1405.pdf
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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. Benjamin Born & Johannes Pfeifer, 2011. "Policy Risk and the Business Cycle," Bonn Econ Discussion Papers bgse06_2011, University of Bonn, Germany.
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  4. Nathaniel Throckmorton & Benjamin Keen & Alexander Richter & William Gavin, 2013. "Global Dynamics at the Zero Lower Bound," 2013 Meeting Papers 839, Society for Economic Dynamics.
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  11. Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "The Zero Lower Bound: Frequency, Duration, and Determinacy," Auburn Economics Working Paper Series auwp2013-16, Department of Economics, Auburn University.
  12. 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.
  13. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
  14. Mendes, Rhys R., 2011. "Uncertainty and the Zero Lower Bound: A Theoretical Analysis," MPRA Paper 59218, University Library of Munich, Germany.
  15. Todd B. Walker & Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Auburn Economics Working Paper Series auwp2014-08, Department of Economics, Auburn University.
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  17. repec:mcb:jmoncb:v:45:y:2013:i::p:535-558 is not listed on IDEAS
  18. 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.
  19. 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.
  20. 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.
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