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The zero lower bound and endogenous uncertainty

Author

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  • Plante, Michael D.

    () (Federal Reserve Bank of Dallas)

  • Richter, Alexander W.

    () (Auburn University)

  • Throckmorton, Nathaniel

    (Indiana University)

Abstract

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.

Suggested Citation

  • Plante, Michael D. & Richter, Alexander W. & Throckmorton, Nathaniel, 2014. "The zero lower bound and endogenous uncertainty," Working Papers 1405, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:1405
    DOI: 10.24149/wp1405
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    Citations

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    Cited by:

    1. Francois Gourio & Jonas Fisher, 2015. "Risk Management for Monetary Policy at the Zero Lower Bound," 2015 Meeting Papers 665, Society for Economic Dynamics.
    2. Richter, Alexander W. & Throckmorton, Nathaniel, 2017. "A New Way to Quantify the Effect of Uncertainty," Working Papers 1705, Federal Reserve Bank of Dallas, revised 23 Feb 2018.
    3. Yasuo Hirose, 2014. "An Estimated DSGE Model with a Deflation Steady State," CAMA Working Papers 2014-52, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Richter, Alexander W. & Throckmorton, Nathaniel, 2016. "Are nonlinear methods necessary at the zero lower bound?," Working Papers 1606, Federal Reserve Bank of Dallas.
    5. Seneca, Martin, 2016. "Risk shocks close to the zero lower bound," Bank of England working papers 606, Bank of England.
    6. Taisuke Nakata & Hiroatsu Tanaka, 2016. "Equilibrium Yield Curves and the Interest Rate Lower Bound," Finance and Economics Discussion Series 2016-085, Board of Governors of the Federal Reserve System (US).
    7. Born, Benjamin & Pfeifer, Johannes, 2016. "The New Keynesian Wage Phillips Curve: Calvo vs. Rotemberg," CEPR Discussion Papers 11568, C.E.P.R. Discussion Papers.
    8. Riyad Abubaker, 2016. "Consumption and Money Uncertainty at the Zero Lower Bound," Economics Bulletin, AccessEcon, vol. 36(1), pages 449-463.
    9. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    monetary policy; uncertainty; economic activity; zero lower bound;

    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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